Morgan Stanley, the top global equity underwriter last year, reported profit that beat analysts’ estimates as brokerage earnings more than doubled and margins from that unit surpassed the firm’s goal for this year.
Fourth-quarter net income was $507 million, or 25 cents a share, compared with a loss of $250 million, or 15 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting charges tied to the firm’s own debt, profit was 45 cents a share, beating the 27-cent average estimate of 24 analysts surveyed by Bloomberg.
Chief Executive Officer James Gorman, 54, is grappling with higher capital requirements and the firm’s failure to post revenue growth in the first nine months of last year. His plan to reduce costs through job cuts and pay deferrals helped fuel a 28% jump in the stock price in the past two months.
“It’s doing a good job in getting wealth management to start to grow quite meaningfully,” Christopher Wheeler, a bank analyst at Mediobanca SpA in London, said in a Bloomberg Radio interview before results were released. “They’ll be looking really hard at what they can do to make sure they don’t dilute what they have in terms of really strong franchises.”
Profit from global wealth management, overseen by Greg Fleming, surged to $581 million as revenue climbed 8% to $3.46 billion. The division’s pretax profit margin rose to 17% from 7% in the fourth quarter of 2011.
Morgan Stanley climbed to $22 in New York trading at 8:11 a.m. from $20.75 at the close yesterday.
Gorman’s plan to boost returns relies on higher profitability from the wealth-management division. Fleming has previously vowed to raise its pretax margin to the “mid-teens” by the middle of this year, and said last month that the increase can be obtained through cost cutting as integration expenses decline. The figure was 13% in the third quarter, excluding a one-time charge.
Morgan Stanley finished integrating its brokerage unit with Citigroup Inc.’s Smith Barney in July. The firm, which owns 65% of the joint venture, plans to ask the Federal Reserve for approval to buy the entire remaining stake this year, it said in a presentation today.
Revenue excluding accounting adjustments climbed to $7.48 billion from $5.46 billion a year earlier, when the firm booked a $1.7 billion loss related to a settlement with bond insurer MBIA Inc. Book value per share rose to $30.65 from $30.53 at the end of September. The firm’s return on equity, a measure of how well it reinvests earnings, was 3%.
“We had a stronger but not perfect fourth quarter,” Gorman said in an interview on CNBC. “We think of all the digging and shoveling and cleaning up that we’ve done the last few years, that’s done. Now we get back to the fun stuff, which is running the business.”
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 it back. The firm booked a $2.3 billion charge in the third quarter as its credit spreads tightened.
Morgan Stanley climbed 1 percent yesterday to $20.75, leaving the stock up 8.5% this month through yesterday. The shares advanced 26% in 2012, after falling 44% the previous year. They are 30% below where they traded when Gorman took over at the beginning of 2010.
Daniel Loeb’s Third Point LLC said this month it bought a stake in the firm, betting the shares may double as brokerage margins improve and management devises a “bold fix” for the bond-trading business.
Finding that solution falls to Colm Kelleher, who took control of the entire investment-banking and trading division this year as his co-head, Paul J. Taubman, 52, retired from that role. Kelleher, 55, is trying to boost the firm’s returns by cutting costs and reducing the amount of capital used by the trading business.
Fourth-quarter revenue from fixed-income sales and trading, run by Ken deRegt with commodity trading co-heads Colin Bryce and Simon Greenshields, was $811 million, excluding DVA. That missed estimates of $1.24 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.1 billion from Credit Suisse Group AG’s Howard Chen.
Fixed-income revenue fell 44% from $1.46 billion in the third quarter. Goldman Sachs Group Inc.’s fixed-income revenue, excluding DVA, climbed almost 60% from a year earlier to $2.12 billion, the company said Jan. 16. Citigroup Inc.’s jumped 58% to $2.71 billion, while JPMorgan Chase & Co. posted a 21% increase to $3.18 billion.
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue fell less than 1% from a year earlier to $1.27 billion, excluding DVA. That was a 4% increase from the third quarter’s $1.23 billion, and compared with $713 million at Bank of America Corp. and $895 million at JPMorgan. Brad Hintz, an analyst at Sanford C. Bernstein & Co., had estimated revenue of $985 million, while Chen at Credit Suisse estimated $1.2 billion.
Morgan Stanley is eliminating 1,600 jobs from its investment-banking division and support staff, after reducing the number of employees by about 4,200 in the first nine months of 2013. It’s also deferring all bonuses for top earners, which will reduce compensation costs recognized in 2012.
The firm generated $1.23 billion in fourth-quarter revenue from investment banking. That figure, up 39% from a year earlier, included $454 million from financial advisory, $237 million from equity underwriting and $534 million from debt underwriting.
The company plans to cut risk-weighted assets within fixed- income and commodities. The firm has already reached its goal for 2013, which was $280 billion, down from $390 billion in the third quarter of 2011, the firm said in a presentation today. Morgan Stanley will continue cutting assets to arrive at less than $200 billion by 2016, according to the presentation.
Asset management reported a pretax gain of $221 million, compared with $78 million in the previous year’s period.
Morgan Stanley was the second-ranked equity underwriter in the quarter, according to data compiled by Bloomberg. It was also the No. 3 adviser on global announced mergers and acquisitions and the fifth-ranked underwriter of U.S. bonds, the data show.