Morgan Stanley Misses Estimates as Trading Revenue Plunges

Morgan Stanley Misses Estimates as Trading Revenue Plunges
The Morgan Stanley headquarters in New York. Photographer: Scott Eells/Bloomberg

Morgan Stanley reported a 50 percent drop in earnings and said it will cut more jobs as revenue from trading stocks and bonds declined the most among Wall Street banks.

Second-quarter net income was $591 million, or 29 cents a share, compared with $1.19 billion, or a loss of 38 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting adjustments, profit was 16 cents a share, below the 29-cent average estimate of 20 analysts surveyed by Bloomberg.

The 48 percent drop in trading revenue, which plunged to the lowest level since Chief Executive Officer James Gorman, 54, took over in January 2010, compares with an increase of more than 11 percent at Goldman Sachs Group Inc. Morgan Stanley said clients shied away from doing business with the firm while Moody’s Investors Service weighed a credit-rating downgrade.

The fixed-income results were “very weak,” said Charles Peabody, an analyst at Portales Partners LLC in New York who rates the stock sector perform. “Strength tends to beget strength and weakness weakness, so I think on the fixed-income side they’re going to end up being a loser.”

Morgan Stanley fell 2.8 percent to $13.60 at 9:38 a.m. in New York. The shares were down 7.5 percent this year through yesterday, after falling 44 percent in 2011, and are 53 percent below where they traded when Gorman took over. The stock is trading at about half the firm’s liquidation value and has dropped the most this year of any of the 10 largest U.S. banks.

Job Cuts

The firm has already cut 3,272 jobs since the start of 2012 and expects that number to climb to 4,000 by year’s end, Chief Financial Officer Ruth Porat said in an interview. Reductions will be gradual and some may come from attrition, she said.

Revenue dropped to $6.95 billion from $9.21 billion a year earlier. Book value per share rose to $31.02 from $30.74 at the end of March. The firm’s return on equity, a measure of how well it reinvests earnings, was 4 percent, below Gorman’s goal of 15 percent.

Second-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, all 56 years old, was $770 million, excluding the accounting gain. That missed estimates of $1.1 billion from Citigroup Inc.’s Keith Horowitz, and $1.39 billion from Barclays Plc’s Roger Freeman.

Accounting Gain

The accounting gain is known as a debt-valuation adjustment, or DVA. It stems from a decline in the price of the company’s bonds, under the theory it would be cheaper to buy back the debt. Morgan Stanley booked $2 billion of losses in the first quarter as cost of repurchasing the debt rose.

Fixed-income revenue was down 70 percent from $2.59 billion in the first quarter and 59 percent from $1.9 billion in the second quarter of 2011. Goldman Sachs’s fixed-income revenue, excluding DVA, climbed more than 40 percent from a year earlier to $2.19 billion. Citigroup’s fell 4 percent to $2.82 billion, while JPMorgan Chase & Co. posted a 17 percent decline to $3.49 billion.

Porat said the results included a $225 million charge related to $2.9 billion of collateral it had to post after Moody’s Investors Service cut the firm’s credit rating by two levels last month. The ratings review also hurt client activity with the firm, Porat said.


“As the speculation on the ratings outcome lingered, clients did seem to take a wait-and-see approach,” she said. “Having that ratings action addressed, now having clarity on it and having that uncertainty gone, we’re seeing real relief among clients. Clients have re-engaged, and it’s good to have it behind us.’

In equities trading, headed by Ted Pick, 43, Morgan Stanley’s revenue fell 36 percent from the year-earlier period to $1.14 billion, excluding DVA. That was a 38 percent decline from the first quarter’s $1.83 billion, and compared with $1.7 billion at Goldman Sachs and $1.04 billion at JPMorgan. Brad Hintz, an analyst at Sanford C. Bernstein, had estimated revenue of $1.45 billion, while Barclays’s Freeman estimated $1.38 billion.

Citigroup on July 16 beat analysts’ estimates on revenue from advising on mergers, corporate lending and underwriting stocks and bonds. Goldman Sachs said the next day it plans to cut $500 million in expenses after reporting the lowest first-half revenue and earnings in seven years. Both companies are based in New York.

Merger Business

The two companies cited a decline in trading and merger volume amid concern that Greece would leave the euro and the region’s debt crisis would spread to nations including Spain and Italy.

Morgan Stanley’s credit-default swaps have fallen since June 21, when Moody’s Investors Service cut the firm’s credit rating two grades instead of the threatened three levels. Morgan Stanley avoided the biggest potential downgrade among U.S. firms because of support from Mitsubishi UFJ Financial Group Inc., its largest shareholder, Moody’s said.

The firm had to post collateral of $2.9 billion as a result of the downgrade, the company said today.

Morgan Stanley generated $884 million in second-quarter revenue from investment banking, which is overseen by Paul J. Taubman, 51. That figure, down 40 percent from a year earlier, included $263 million from financial advisory, $283 million from equity underwriting and $338 million from debt underwriting.

Stock Underwriting

Morgan Stanley was the second-ranked equity underwriter in the quarter, according to data compiled by Bloomberg. It was the lead underwriter on Facebook Inc.’s initial public offering, which set a record for technology companies by raising more than $16 billion. The stock has dropped 23 percent since the IPO, leading to shareholder lawsuits claiming the company and its underwriters overpriced Facebook at $38 a share.

Morgan Stanley said it adhered to the same procedures it follows for all IPOs and complied with all applicable regulations.

Global wealth management, overseen by Greg Fleming, 49, posted pretax income of $393 million, up from $317 million a year earlier, as revenue fell 4 percent to $3.31 billion. The division’s pretax profit margin rose to 12 percent from 9 percent in the second quarter of 2011.

Smith Barney

Gorman said on a conference call with analysts that the bank finished the technology integration of the Morgan Stanley Smith Barney brokerage this month. He has previously said his target is a 20 percent pretax margin. The figure was 11 percent in the first quarter, and Fleming has vowed to raise the margin to ‘‘mid-teens” by the middle of next year.

Morgan Stanley said in May it would exercise the option to buy a 14 percent stake in the venture from Citigroup, increasing its ownership to 65 percent. The two companies’ valuations of the unit’s value were more than 10 percent apart, requiring a third-party appraiser to complete the deal, Porat said in the interview.

Asset management reported a pretax gain of $43 million, down from $168 million in the previous year’s period.

Compensation and benefits decreased 21 percent from the year-earlier quarter to $3.63 billion, or 52 percent of the firm’s overall revenue. The ratio was higher than in the second quarter of 2011, when the bank set aside 50 percent of revenue.


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