Morgan Stanley Shares Climb as Brokerage Profit DoublesMichael J. Moore
Morgan Stanley, owner of the world’s biggest brokerage, rose the most in seven months after earnings from that business more than doubled and the firm reached profit-margin targets six months ahead of schedule.
Morgan Stanley surged 7.9 percent to $22.38 at 4:15 p.m. in New York, the biggest gain since June 6. The shares closed at the highest level since July 27, 2011.
The brokerage’s improved profitability strengthens Chief Executive Officer James Gorman’s plan to boost returns as he requests regulatory approval to buy Citigroup Inc.’s remaining 35 percent stake in the business. Earnings at the brokerage, run by Greg Fleming, increased to $385 million in the fourth quarter and the pretax profit margin rose to 17 percent from 7 percent a year earlier.
“We’re seeing the margins move up on wealth management, that’s the encouraging thing,” Brad Hintz, an analyst at Sanford C. Bernstein & Co., said in a Bloomberg Radio interview. “If he’s getting a 17 percent pretax margin in retail without the flow, this implies that when retail comes back, that’s when the margins really pop.”
Fleming, 49, previously vowed to raise his unit’s 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 percent in the third quarter, excluding a one-time charge.
Gorman, 54, is reducing costs through job cuts and pay deferrals, a strategy that helped fuel a 28 percent jump in the stock price in the past two months before today. Morgan Stanley finished integrating its brokerage unit with Citigroup’s Smith Barney in July.
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 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.
“We’ve done a lot of building, and it’s at the point now where we feel we’re pivoting from those cleanups and building activities to now just running the business,” Gorman said in a Bloomberg Television interview. “If anything can get management excited, it’s about looking forward and actually running the business, rather than looking backwards and trying to solve things from the past.”
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 percent.
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.
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 percent from $1.46 billion in the third quarter. Goldman Sachs Group Inc.’s fixed-income revenue, excluding DVA, dropped 14 percent from the previous quarter to $2.12 billion, the company said Jan. 16. Citigroup’s declined 27 percent to $2.71 billion, while JPMorgan Chase & Co. posted a 15 percent drop to $3.18 billion.
Banks including UBS AG have announced plans to exit some fixed-income businesses or shrink those units in response to higher capital requirements and lower revenue. Gorman said he has no plans to exit the business.
“It would be completely foolish for Morgan Stanley to even approach that concept,” Gorman said today in an interview on Bloomberg Television with Erik Schatzker.
Gorman’s strategy is to cut in half the capital required to run the fixed-income business by 2016, from $35 billion in the third quarter of 2011 to less than $18 billion. He called that plan “very bold.”
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue fell less than 1 percent from a year earlier to $1.27 billion, excluding DVA. That was a 4 percent 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 2012. It’s also deferring all bonuses for top earners, which will reduce compensation costs recognized in 2012.
Gorman said in today’s interview he’s “very comfortable” with headcount at the firm.
The firm generated $1.23 billion in fourth-quarter revenue from investment banking. That figure, up 39 percent 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.
The cost of protecting Morgan Stanley’s debt from losses for five years fell to the lowest since June 2011. Credit-default swaps on the company’s debt declined 5.8 basis points to 154.68 basis points as of 3:50 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices in the privately negotiated market.
Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.