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Morgan Stanley (Getty Images)
Morgan Stanley, the sixth-largest U.S. bank, reported third-quarter results that beat analysts’ estimates as revenue from fixed-income trading almost doubled from the second quarter.
Morgan Stanley posted a loss of $1.01 billion, or 55 cents a share, compared with a profit of $2.2 billion, or $1.15, a year earlier, the New York-based firm said today in a statement. Excluding accounting adjustments and a one-time restructuring cost, profit was about 35 cents a share, compared with the 25- cent average estimate of 22 analysts surveyed by Bloomberg.
Chief Executive Officer James Gorman, 54, is trying to improve returns at the brokerage unit and shrink the fixed- income trading division to reduce capital demands. The bank had the lowest first-half return on equity of the 10 largest U.S. lenders and is trading at two-thirds of its liquidation value, compared with 96 percent at Goldman Sachs Group Inc.
“The rebound in fixed-income and commodities sales and trading indicates that clients have re-engaged after the uncertainty of the rating review in the previous quarter,” Gorman said in the statement, referring to Moody’s Investors Service’s two-level downgrade of Morgan Stanley’s credit rating in June.
Morgan Stanley rose 1.6 percent to $18.78 at 7:39 a.m. in New York trading, adding to this year’s 22 percent rise through yesterday. The shares fell 44 percent in 2011, the biggest decline since 2008. They are 38 percent below where they traded when Gorman took over at the beginning of 2010.
Book Value
Revenue excluding accounting charges climbed to $7.55 billion from $6.40 billion a year earlier, and book value per share fell to $30.53 from $31.02 at the end of June.
The accounting charge is known as a debt-valuation adjustment, or DVA. It stems from increases in the value of the company’s debt, under the theory it would be more expensive to buy back the debt and extinguish the interest payments. Morgan Stanley booked a $3.4 billion gain in the year-earlier quarter as yields on its debt rose compared to Treasuries.
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 $1.46 billion, excluding DVA. That topped estimates of $1.2 billion from Atlantic Equities LLC’s Richard Staite, and $1.1 billion from Barclays Plc’s Roger Freeman.
Fixed-income revenue climbed 89 percent from $770 million in the second quarter and 33 percent from $1.1 billion in the third quarter of 2011. Goldman Sachs’s fixed-income revenue, excluding DVA, increased 72 percent from a year earlier to $2.45 billion. Citigroup Inc.’s jumped 63 percent to $3.7 billion, while New York-based JPMorgan Chase & Co. posted a 33 percent increase to $3.73 billion.
Gorman has pledged to shrink the fixed-income trading division, which requires a majority of the firm’s regulatory capital and has trailed revenue of rivals since the financial crisis. Morgan Stanley plans to cut risk-weighted assets within fixed-income and commodities, overseen by Colm Kelleher, from $320 billion on June 30 to $255 billion by the end of 2014, Chief Financial Officer Ruth Porat, 54, said last month.
Part of the reduction could come from selling a stake in its commodities unit. Qatar is considering investing in the unit, Prime Minister Sheikh Hamad bin Jassim Al Thani said this week. The commodities business, which includes trading in futures contracts and buying and selling physical commodities, may be affected by the Volcker rule, which limits banks’ ability to trade for their own account.
Equities Trading
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue fell 8 percent from the year-earlier period to $1.23 billion, excluding DVA. That was a 7 percent increase from the second quarter’s $1.14 billion, and compared with $2.1 billion at Goldman Sachs and $1.04 billion at JPMorgan. Brad Hintz, an analyst at Sanford C. Bernstein, had estimated revenue of $1.1 billion, while Credit Suisse Group AG’s Howard Chen estimated $1.2 billion.
Citigroup climbed 5.5 percent on Oct. 15 in New York trading after reporting a 64 percent increase in trading revenue. Goldman Sachs said Oct. 16 that its third-quarter trading revenue jumped 26 percent from a year earlier. Both companies are based in New York.
Morgan Stanley generated $969 million in third-quarter revenue from investment banking, which is overseen by Paul J. Taubman. That figure, up 12 percent from a year earlier, included $339 million from financial advisory, $199 million from equity underwriting and $431 million from debt underwriting.
Global wealth management posted pretax income of $239 million, down from $356 million a year earlier, as revenue climbed 3 percent to $3.34 billion. The division’s pretax profit margin fell to 7 percent from 11 percent in the third quarter of 2011.
Greg Fleming, who runs the business, vowed to raise the unit’s pretax margin to the “mid-teens” by the middle of next year. Excluding one-time charges, the firm said the margin rose to 13 percent from 12 percent in the second quarter.
Fleming met with financial advisers across the U.S. last quarter after disruptions caused by a new technology and operations system sparked complaints. Morgan Stanley finished integrating its brokerage unit with Smith Barney in July, an effort that included developing a technology system for all financial advisers. Some brokers were frustrated by a more cumbersome process to enroll new clients and less automation with some distributions.
Smith Barney
Morgan Stanley now owns 65 percent of the brokerage after paying $1.89 billion for an additional 14 percent stake in September following a two-month fight over the value of the venture. The two banks agreed on a valuation for the purchase of the remaining 35 percent stake, which Morgan Stanley must buy all of by June 2015. The firm will probably ask the Federal Reserve for approval to purchase the rest next year, according to a person briefed on the bank’s thinking.
Asset management reported a pretax gain of $198 million, compared with a loss of $118 million in the previous year’s period.
Compensation and benefits increased 8 percent from the year-earlier quarter to $3.93 billion, or 52 percent of the firm’s total revenue, excluding DVA. The ratio was lower than in the year-earlier quarter, when the bank set aside 57 percent of revenue on that basis.
