Credit rating agencies are reacting cautiously to Philip Purcell’s decision to abandon his fight for control of Morgan Stanley, waiting to see how the firm’s new strategy shapes up.

Fitch Ratings says the firm’s ratings remain on Rating Watch Negative following the announced retirement of Morgan’s chairman and chief executive officer Purcell, which it calls the board’s first step to move forward in re-establishing certainty regarding long-term leadership and strategic direction at Morgan Stanley.

“Resolution of the Negative Rating Watch will be dependent upon the timing, choice and strategies of new executive management to stem the current wave of employee departures, to achieve a balance in diversification of revenues while improving the profitability of the retail brokerage and investment management and to retain the strength of the Institutional Securities segment,” it says. “Capital and funding of the institution is also an important factor particularly given the possible spin-off of Discover. A ratings downgrade, if it occurs, is not expected to exceed one notch.”

Also, Standard & Poor’s Ratings Services says the announcement will not affect the company’s ratings or outlook. “The outlook revision to negative in April 2005 reflected our concerns over the continuing departures of senior management within the Institutional Securities Group and the resulting strategic flux and uncertainty,” it says.

“Purcell has been a polarizing influence in recent months, and his departure will afford Morgan Stanley an opportunity to start fresh with its key constituents,” S&P adds. “We will be monitoring Morgan Stanley’s progress in appointing a new CEO and the resulting affirmation of the company’s existing strategy or a change in strategy.”

“The resolution of the negative outlook will depend on our comfort with the strategy,” S&P notes. “In addition to the strategy, we will be monitoring the turnaround of financial results, which, for second-quarter 2005, are projected to be 15%-20% lower than they were for the comparable period in 2004.”

Fitch says it is dismayed at the ongoing departures of Morgan Stanley executives principally in the Institutional Securities segment. “Fitch does not believe these businesses rely on the direction of a few, but rather on many. The retirement of Philip Purcell may produce some staff stability in the near-term however; a material change in the strategic direction of the firm may further spur departures,” it cautions.