April 22 (Bloomberg) -- Morgan Stanley reported a bigger- than-estimated $177 million loss and slashed its dividend to 5 cents as real estate and debt-related writedowns overwhelmed trading gains. The shares fell 9 percent.

The first-quarter loss was 57 cents a share, New York-based Morgan Stanley said today in a statement. The average estimate of 19 analysts surveyed by Bloomberg was for a loss of 8 cents. The company also had a loss of $1.3 billion in December before the start of its new fiscal year.

“The only thing that was good was investment banking, frankly everything else was weak,” said Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York who once served as Morgan Stanley’s treasurer. “I’m disappointed.”

The company had $1 billion of real-estate losses in the first quarter and writedowns of $1.5 billion from an accounting loss related to an improvement in the firm’s creditworthiness compared with Treasury bonds. Chief Executive Officer John Mack converted Morgan Stanley, the second-biggest U.S. securities firm, into a bank last year and announced plans in January to take control of Citigroup Inc.’s brokerage as he seeks to restore earnings and limit risks.

Morgan Stanley dropped $2.21 to $22.44 in New York Stock Exchange composite trading at 4:10 p.m., after falling to $22.26 earlier today. The shares had climbed 54 percent this year before today, and lost 70 percent last year.

Bank of America

Morgan Stanley, which paid a quarterly dividend of 27 cents a share for the past four years, follows Bank of America Corp., JPMorgan Chase & Co. and Citigroup in slashing its dividend. JPMorgan cut its payout by 87 percent to 5 cents on Feb. 23, a month after Bank of America and Citigroup cut theirs to 1 cent.

“The stock isn’t really reflecting the dividend, so you might as well just go ahead and reduce it and build your capital base quicker,” said Peter Kovalski, a fund manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees about $5 billion. “Right now if you have a strong capital base you sit in the driver’s seat.”

The dividend reduction will save about $1 billion a year, Chief Financial Officer Colm Kelleher said in an interview. Kelleher, 51, said the “great bulk” of December’s $1.3 billion loss, approximately $1 billion, came from writedowns on leveraged loans and residential and commercial real estate.

Hintz questioned the decision to cut the dividend, which he said is the main source of cash flow for many of the firm’s employees whose net worth is tied up in restricted stock.

Talent Drain

“When you cut the dividend you are cutting out the cash that these guys are using to live on in what is arguably a downturn in the industry,” he said. “Are you trying to lose talent out of your company?”

Goldman Sachs Group Inc., JPMorgan and Citigroup reported gains in first-quarter trading revenue as smaller rivals Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. were taken over by banks.

Morgan Stanley’s fixed-income revenue of $1.3 billion was less than one-fifth of Goldman Sachs’s $6.56 billion in the quarter and less than Citigroup’s $4.69 billion and JPMorgan’s $4.9 billion. Morgan Stanley’s fixed-income revenue included $1 billion of write downs on credit spreads while Citigroup’s included $2.5 billion of gains on credit spreads.

“It is about risk appetite,” Kelleher said on a conference call with analysts, adding that the firm was more cautious about taking advantage of market “opportunities.” Still, he said the firm gained market share in fixed-income markets.

‘Well-Thrown Ball’

“I don’t see how you could be gaining market share if you’re pulling in all your customer financing like they are,” Bernstein’s Hintz said. “Effectively they let a perfectly well- thrown ball just zoom right by them.”

Accounting rules require the bank to write down the value of structured notes based on the company’s debt when the value of the debt increases. The bank had a $1 billion gain a year ago when its credit spreads widened.

The results included a 33-cent per share tax benefit “resulting from the anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates.”

The $177 million first-quarter loss excludes the cost of paying dividends to preferred shareholders. Including those dividend payments, which have increased because of the sales of preferred stock to the U.S. government and to Japan’s Mitsubishi UFJ Financial Group Inc., the company lost $578 million in the quarter.

Book Value Falls

Morgan Stanley’s book value per share fell to $27.32 from $30.24 on Nov. 30 as the company reported its second consecutive quarterly loss. Total assets fell 7 percent from the end of December to $626 billion. The company’s compensation expense of $2.08 billion in the quarter was 68 percent of revenue, higher than a typical ratio of 40 percent to 50 percent.

The bank accepted $10 billion from the U.S. Treasury’s Troubled Asset Relief Program in October, on the same day that it closed a $9 billion sale of preferred stock to Mitsubishi UFJ. Morgan Stanley has also sold more than $25 billion of debt guaranteed by the Federal Deposit Insurance Corp. under the Temporary Liquidity Guarantee Program established in October, helping to reduce its borrowing costs.

TARP Repayment

While executives at New York-based Goldman Sachs and JPMorgan have said they’re eager to return their TARP money as soon as possible, Mack, 64, told employees on March 30 that “it’s the wrong time” to return the government aid as he forecast a “difficult” year in 2009.

Morgan Stanley’s Tier 1 capital ratio, calculated under the so-called Basel 1 rules, was 16.4 percent at the end of March and 12.9 percent if the firm repaid TARP. Those are higher than JPMorgan’s 11.3 percent ratio, or 9.2 percent excluding TARP capital, Kelleher said in the interview. Goldman Sachs’s ratio including TARP was 13.7 percent.

“We are clearly very comfortable with these numbers,” Kelleher said. “If permitted and supported by our supervisors, we would like to consider repayment of TARP capital.”

Institutional securities, the firm’s biggest division and the one that incorporates its traditional investment-banking and trading activities, reported revenue of $1.7 billion in the first quarter and a $434 million pretax loss. Equities revenue was $900 million and investment banking brought in $812 million.

“It’s a disappointing quarter,” said Charles Peabody, an analyst at Portales Partners LLC, who had forecast a 16-cent first-quarter loss. “Morgan Stanley is still reeling from their legacy asset exposure. They’ve had a lot more commercial real- estate exposure throughout the entity.”

Global wealth management, the unit that is merging with Citigroup’s Smith Barney, had $1.3 billion of first-quarter revenue and pretax income of $119 million.

Asset management, which incorporates sales of mutual funds as well as investments in alternative assets such as private equity and real estate, reported revenue of $72 million and a first-quarter loss of $559 million.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: April 22, 2009 16:13 EDT