By Michael J. Moore - Oct 19, 2011 11:11 PM GMT+0700
Oct. 19 (Bloomberg) -- Charles Peabody, an analyst at Portales Partners LLC, talks about Morgan Stanley's third-quarter earnings and outlook. Morgan Stanley said net income was $2.2 billion, or $1.15 a share, compared with $131 million, or a loss of 7 cents a share after preferred dividends, a year earlier. Peabody speaks with Erik Schatzker and Scarlet Fu on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Morgan Stanley Chief Executive Officer James Gorman. Photographer: Jin Lee/Bloomberg
Morgan Stanley (MS) rose as much as 6.7 percent in New York trading after the firm posted third-quarter profit that beat analysts’ estimates on an accounting gain and higher stock-trading revenue.
Net income was $2.2 billion, or $1.15 a share, compared with $131 million, or a loss of 7 cents a share after preferred dividends, a year earlier, the New York-based company said today in a statement. Earnings beat the 30-cent average estimate of 25 analysts surveyed by Bloomberg. The shares climbed for a fourth day, the longest such streak since February.
Morgan Stanley’s 20 percent gain in year-over-year equities-trading revenue was the biggest among the largest U.S. banks, excluding the accounting benefit. Fixed-income fell 17 percent. Chief Executive Officer James Gorman, 53, is trying to stem a 39 percent decline in the firm’s shares this year through yesterday that left the stock trading at a level last seen during the financial crisis in January 2009.
“We saw more activity on the cash equities side, particularly in electronic trading, and the derivatives business continued to do well,” Chief Financial Officer Ruth Porat said in an interview after earnings were released. “The more challenging part of the market was in the fixed-income market.”
Excluding the accounting gain, known as debt valuation adjustments, or DVA, profit was 3 cents a share, compared with estimates of a 9-cent loss from Citigroup Inc. analyst Keith Horowitz and a 23-cent loss from Barclays Capital’s Roger Freeman.
Share Performance
Shares of the company rose 40 cents, or 2.4 percent, to $17.03 at 11:50 a.m. in New York, the fifth-biggest increase in the 81-company Standard & Poor’s 500 Financials Index. They surged 9.1 percent yesterday.
The DVA gain stems from declines in the value of the company’s debt, under the theory that a profit would be realized if the debt were repurchased at a discount. Citigroup and JPMorgan Chase & Co. (JPM) each booked more than $1.5 billion of such gains as bank credit spreads widened in the quarter.
Revenue at Morgan Stanley climbed 46 percent to $9.89 billion from $6.78 billion a year earlier. Book value per share rose to $31.29 from $30.17 at the end of June. The firm’s return on equity from continuing operations, a measure of how well it reinvests earnings, was 14.5 percent.
“Morgan Stanley effectively navigated turbulent markets while consolidating our market share gains with institutional clients,” Gorman said in the statement.
Fixed Income
Third-quarter revenue from fixed-income sales and trading, which is run by Ken deRegt along with commodity trading co-heads Colin Bryce and Simon Greenshields, was $3.88 billion. Excluding DVA, fixed-income revenue was about $1.1 billion, down from $1.9 billion in the second quarter and $1.31 billion in the third quarter of 2010. The figure compared with $2.8 billion at JPMorgan, $2.27 billion at Citigroup and $1.43 billion at Goldman Sachs Group Inc.
Interest-rates trading revenue increased from the second quarter, and the firm saw share gains in foreign-exchange trading, Porat said on a conference call with analysts. Credit trading suffered from “illiquidity” in the corporate credit and mortgage markets, she said.
Losses from hedges tied to monoline insurers reduced fixed- income trading revenue by $284 million, and the bank booked $400 million on leveraged loan writedowns, Porat said.
In equities trading, headed by Ted Pick, Morgan Stanley’s third-quarter revenue was $1.96 billion. Excluding DVA, revenue fell 26 percent from the second quarter to $1.34 billion. That compared with $2.18 billion at Goldman Sachs and $289 million at Citigroup.
Morgan Stanley generated $864 million in third-quarter revenue from investment banking, which is overseen by Paul J. Taubman. That figure, down 14 percent from a year earlier, included $413 million from financial advisory, $239 million from equity underwriting and $212 million from debt underwriting.
“Core trading and investment-banking revenue held up better than our muted estimates while expense control was good,” Ed Najarian, an analyst at International Strategy & Investment Group Inc., said today in a note to clients.
Global wealth management, overseen by Greg Fleming, posted pretax income of $362 million, up from $281 million in the third quarter of 2010. The division’s pretax profit margin rose to 11 percent from 10 percent in the first half. Gorman has said the unit should eventually post a pretax profit margin of more than 20 percent.
Asset management reported a pretax loss of $117 million, compared with profit of $279 million in the previous year’s period.
Compensation and Benefits
Compensation and benefits were unchanged from the year- earlier quarter at $3.68 billion, or 37 percent of the firm’s overall revenue. The ratio was lower than in the third quarter of 2010, when the bank set aside 54 percent of revenue.
Morgan Stanley increased its forecast for annual savings from an initiative to trim expenses to $1.4 billion, from $1 billion when the three-year project was announced in May.
Goldman Sachs Group Inc. yesterday reported its second unprofitable quarter in 12 years as a public company as the firm lost money on investments and revenue declined from trading, asset management and securities underwriting. JPMorgan Chase fell 4.8 percent on Oct. 13 as it reported trading revenue dropped 28 percent from the second quarter, excluding DVA. Both companies are based in New York.
S&P Downgrade
Slowing economic growth, Standard & Poor’s decision to downgrade the U.S. government’s credit rating and heightened worries that European sovereign debt issues could spread to its banks caused market declines and increased volatility in the quarter.
Porat said at a Barclays Capital conference last month that the fixed-income trading environment in the third quarter was worse than in 2010’s fourth quarter, when the five biggest U.S. investment banks posted their lowest trading revenue since the financial crisis.
The market turbulence affected the firm’s own shares, which fell 41 percent in the third quarter. The stock dropped further in the first week of October to $11.58, the lowest since December 2008.
The volatility prompted Mitsubishi UFJ Financial Group Inc., Morgan Stanley’s largest common shareholder, to release a statement on Oct. 3 saying it’s “firmly committed” to its strategic alliance with Morgan Stanley. Gorman sent a memo to employees the same day, encouraging them to remain focused on their jobs and clients instead of responding to “the rumor of the day.”
‘Fragile Markets’
“There has been an enormous amount of confusion and misinformation about Morgan Stanley and others in our peer group,” he wrote in the memo, which was obtained by Bloomberg News. “In fragile markets, where fear triumphs over common sense, these things are bound to happen.”
The bank repurchased about $2 billion of its own bonds as prices fell, Porat said. The gain on the buybacks was less than $100 million, she said.
Morgan Stanley updated figures for risks linked to Europe in a presentation on its website today, saying the five countries at the center of Europe’s debt crisis totaled $2.11 billion in exposure including hedges against losses. The risks linked to France were negative $286 million.
To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.
To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net
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