Morgan Stanley Climbs as Results Beat Estimates, Expenses Drop

Morgan Stanley: Fixed-Income Rebound Very Limited
  • Firm announces `Project Streamline' to cut $1 billion in costs
  • Revenue climbs 5.3% as equity-trading revenue increases

Morgan Stanley rose in New York trading after reporting profit and revenue that exceeded analysts’ estimates and plans for cutting at least $1 billion in costs by next year.

Shares of the company jumped 2.5 percent to $26.62 at 10:12 a.m., compared with a 0.8 percent increase in the 88-company Standard & Poor’s 500 Financials Index. Excluding accounting adjustments, fourth-quarter earnings were 43 cents a share, beating the 32-cent average estimate of analysts surveyed by Bloomberg.

Chief Executive Officer James Gorman, 57, is emphasizing cost-cutting as the firm struggles to achieve profitability targets. He’s also attempting to strike the right balance in Morgan Stanley’s bond-trading business amid the industry’s years-long slide in revenue. The firm said last month that it was taking a $150 million severance charge as it pared its fixed-income trading business. The cuts affected 1,200 employees, including about a quarter of its fixed-income trading staff, a person briefed on the matter said.

“A strong overall performance in the first half of the year was impacted by difficult market conditions in the second half that dampened trading activity,” Gorman said in a statement. “In the fourth quarter, we took action to meaningfully restructure our fixed-income business on a capital and expense basis.”

The firm set a target for return on equity of 9 percent to 11 percent for 2017, compared with Gorman’s longstanding goal of at least 10 percent. Last year’s ROE was 7.8 percent, excluding accounting adjustments.

“We still have a target ROE of 10 percent or higher,” Chief Financial Officer Jonathan Pruzan said in an interview. “We did put for the first time a timeline on that, and we did put a range in light of just the volatile and uncertain times that we live in.”

Morgan Stanley could achieve its target in part by cutting expenses: The firm announced a new efficiency plan, “Project Streamline,” which should reduce at least $1 billion in costs by 2017, assuming flat revenue, according to a presentation that accompanied the earnings statement. The firm promised to consolidate processes and real estate and lean more heavily on outsourcing.

Fourth-quarter net income was $908 million, or 39 cents a share, compared with a loss of $1.6 billion, or 91 cents, a year earlier, when the firm booked costs tied to settling mortgage-related matters, the New York-based company said.

Excluding accounting charges, revenue climbed 5.3 percent to $7.9 billion, exceeding the $7.67 billion estimate of 20 analysts surveyed by Bloomberg. Costs fell across the company. Non-compensation expenses plunged to $2.6 billion from $5.6 billion a year earlier, when the bank had a $3.1 billion litigation charge. Expenses for employee pay shrank to $3.7 billion from $5.1 billion, even including the severance costs.

Equities-trading revenue rose to $1.8 billion from $1.6 billion, higher than all four estimates by analysts surveyed by Bloomberg. Results were driven by strength in cash equities and prime brokerage, Pruzan said. Advisory revenue rose 5.7 percent to $516 million on higher mergers activity. Income in the wealth-management division increased 4.3 percent to $768 million as compensation costs declined.

Fixed-income trading revenue fell 8.2 percent to $550 million in the fourth quarter, excluding one-time items, a steeper drop than many analysts had estimated and the second-lowest since the financial crisis. David Konrad, an analyst at Macquarie Securities USA Inc., had projected revenue of $580 million and Matt Burnell of Wells Fargo & Co. estimated $607 million. The firm said Tuesday that it had failed to meet objectives in the bond division.

The bank last week named Sam Kellie-Smith, who helped Morgan Stanley become Wall Street’s top equities-trading shop by revenue, to revamp fixed income -- a capital-intensive area that several rivals have been retreating from in the face of tougher rules. Kellie-Smith is the sixth manager to take on that challenge in the past seven years.

Colm Kelleher, 58, was promoted to president earlier this month, adding oversight of the retail brokerage in addition to investment banking and trading. That prompted the exit of Greg Fleming, 52, who led the brokerage.

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