Morgan Stanley Shares Fall as Trading Revenue DeclinesMichael J. Moore
Morgan Stanley fell to a three-month low in New York after the firm reported the biggest drop in trading revenue among the largest U.S. banks.
Shares of the company slumped 5.4 percent to $20.31, the biggest decline on the 81-company Standard & Poor’s 500 Financials Index. Bond-trading revenue fell 42 percent in the first quarter and stock-trading revenue declined 19 percent, New York-based Morgan Stanley said today in a statement.
The drop in fixed-income revenue was the third in the past four quarters, and offset the company’s record first-quarter pretax profit from the brokerage unit. Goldman Sachs Group Inc. reported a decline of 9 percent in bond-trading revenue earlier this week, compared with 3 percent at Citigroup Inc.
“The fixed-income rebuild hasn’t worked as well as they had hoped,” David Trone, an analyst with JMP Securities LLC in New York, said in a Bloomberg Radio interview. “They want to be more of an asset-gathering institution that also does investment banking and a little bit of trading. They’re not yet really to the point where they’ve convinced all of us what they are yet.”
First-quarter revenue from fixed-income sales and trading, run by Ken deRegt with commodity trading co-heads Colin Bryce and Simon Greenshields, was $1.52 billion, excluding an accounting charge. That missed estimates of $2.05 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.8 billion from Credit Suisse Group AG’s Howard Chen.
“We don’t view $1.5 billion as a ceiling on what’s attainable in the fixed-income and commodities business,” Chief Financial Officer Ruth Porat said in an interview.
Porat said on a conference call with analysts that the firm is still “comfortable” with its goal of an 8 percent market share in fixed income among the largest banks.
The business suffered from lower revenue in commodities because of so-called backwardation, in which earlier-dated contracts are priced higher than later ones, and as clients were less active in hedging, Porat said. Revenue also fell in interest rates, while it had strong performance in credit and foreign-exchange trading, she said.
The bank cut risk-weighted assets in its fixed-income business to $253 billion from $280 billion in December, Porat said. That represented a bigger reduction than the firm had targeted for all of 2013.
Chief Executive Officer James Gorman, 54, has assigned Colm Kelleher, who oversees investment banking and trading for Morgan Stanley, with shrinking the amount of capital the fixed-income unit needs under new rules by 60 percent from its peak.
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue fell to $1.59 billion from a year earlier, excluding the accounting charge. That compared with $1.15 billion at Bank of America Corp. and $1.72 billion at Goldman Sachs, excluding revenue from Goldman’s reinsurance business.
Brad Hintz, an analyst at Sanford C. Bernstein & Co., had estimated equities revenue of about $1.4 billion, while Chen at Credit Suisse estimated $1.7 billion.
First-quarter net income was $984 million, or 49 cents a share, compared with a loss of $94 million, or 6 cents, a year earlier. Excluding the accounting charge, profit was 61 cents a share, topping the 56-cent average estimate of 20 analysts surveyed by Bloomberg.
A 48 percent jump in pretax profit from the brokerage supported Gorman’s goal of doubling the firm’s return on equity by relying on better margins from that business and buying the 35 percent it doesn’t already own from Citigroup.
“Wealth management seems to be coming to the fore,” Chris Kotowski, an analyst at Oppenheimer & Co., said in a note. “Its total contribution increased 29 percent. We would expect further improvement here after Morgan Stanley buys the rest of Citi’s stake.”
Total revenue excluding accounting adjustments fell to $8.48 billion from $8.9 billion a year earlier. Book value per share rose to $31.22 from $30.70 at the end of December. The firm’s return on equity, a measure of how well it reinvests earnings, was 6 percent.
Excluding an accounting charge known as a debt valuation adjustment, or DVA, ROE was 8 percent. Gorman in January laid out a plan to increase the gauge to 10 percent. He said today that the consistency of the bank’s returns is as important as the level.
“In addition, we believe many of the regulatory headwinds that face the industry are already reflected in our results,” Gorman said. “And because our growth areas are those that are unlikely to be much impacted by further regulation, our path is clearer.”
DVA 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 had a $317 million loss from DVA, versus a $1.98 billion charge in the first quarter of 2012.
Pretax profit from global wealth management, overseen by Greg Fleming, 50, jumped to $597 million as revenue climbed to $3.47 billion. The division’s pretax profit margin rose to 17 percent from 12 percent in the first quarter of 2012.
Fleming has previously vowed to raise its pretax margin to the “mid-teens” by the middle of this year, and has said that the increase can be obtained through cost cutting as integration expenses decline. The figure was 17 percent in the fourth quarter, which Gorman cautioned was seasonally higher than the first quarter.
Porat, 55, said an increase in closed-end fund issuance helped boost revenue and produce higher margins than the firm had told analysts to expect.
“What it really shows is the operating leverage in the business, that just some incremental new-issue activity could result in that kind of improvement over our expectations,” Porat said in an interview.
Morgan Stanley received approval last month from the Federal Reserve to buy the rest of the brokerage from Citigroup this year. Gorman already has set a price with Citigroup to purchase the rest of the joint venture, which was created in 2009. Morgan Stanley said in January it will pay $4.7 billion for the last piece, which will place demands on an additional $400 million of capital.
Gorman said the purchase needs further approval from the Fed, which may come in “the next several weeks or months.” Porat said approval for last year’s purchase of a 14 percent stake in the unit came in May.
Fleming pledged $500 million for upgrades and hired a new technology head for the division after financial advisers complained about glitches and more cumbersome processes following the integration of Morgan Stanley’s system with that of Smith Barney last year.
Asset management reported a pretax gain of $187 million, compared with $128 million in the previous year’s period.
Investment banking, led by Mark Eichorn and Franck Petitgas, generated $945 million in first-quarter revenue. That figure, up 11 percent from a year earlier, included $251 million from financial advisory, $283 million from equity underwriting and $411 million from debt underwriting.