Morgan Stanley Misses Estimates on Bond-Trading Revenue

Morgan Stanley, owner of the world’s largest brokerage, reported profit that missed analysts’ estimates as fixed-income trading revenue fell to the lowest since the financial crisis.

Fourth-quarter net income rose to $1.04 billion, or 47 cents a share, from $84 million, or 2 cents, a year earlier, the New York-based company said today in a statement. Profit was 39 cents a share including an accounting adjustment, a tax benefit, a change in compensation policy and other one-time items. That compared with the 50-cent average estimate of 14 analysts surveyed by Bloomberg.

Fixed-income trading revenue fell 14 percent to $599 million, excluding the one-time items, a steeper drop than many analysts had estimated. Chief Executive Officer James Gorman, 56, has seen his firm’s revenue from that business drop to less than half what it was in 2006 as he seeks to cut the amount of capital the unit requires.

“Morgan Stanley isn’t immune from the overall trend of a difficult trading environment” even if their trading operations are smaller, Devin Ryan, an analyst at JMP Group Inc., said before results were announced. “There was pressure on credit-trading revenue broadly.”

Morgan Stanley, which fell 10 percent this year through Jan. 16, dropped 1.6 percent to $34.32 at 10:35 a.m. in New York. The stock more than doubled in the three years ended last month, including a 24 percent jump in 2014 that led the biggest U.S. investment banks for a second straight year.

Fixed Income

Fourth-quarter revenue from fixed-income sales and trading, run by Michael Heaney and Robert Rooney with commodity trading co-heads Nancy King and Peter Sherk, excluded debt-valuation adjustments and a $468 million charge from changing the valuation of some over-the-counter derivatives to incorporate funding costs. So-called funding valuation adjustments, or FVA, estimate a present value of those funding costs rather than spreading them over the life of the derivative contract.

The fixed-income results fell short of estimates of $659 million from Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods Inc., and $800 million from Barclays Plc’s Jason Goldberg.

Revenue excluding DVA and including FVA declined 8.2 percent to $7.54 billion from a year earlier. Book value per share climbed to $34.62 from $34.16 at the end of September. The firm’s return on equity, a measure of how well it reinvests earnings, was 5.4 percent for the quarter.

Equities Trading

In equities trading, headed by Ted Pick, Morgan Stanley’s revenue rose 8.1 percent from a year earlier to $1.63 billion, excluding DVA. That compared with $911 million at Bank of America Corp. and $1.9 billion at Goldman Sachs Group Inc. Kleinhanzl estimated equities revenue of about $1.56 billion, while Goldberg predicted $1.4 billion.

Colm Kelleher, 57, oversees the firm’s equity and fixed-income trading businesses.

The brokerage division posted net income of $736 million on record net revenue of $3.8 billion.

Morgan Stanley last year boosted its targets for the wealth-management unit’s profit margin, saying it can reach a goal of as high as 25 percent by the fourth quarter of this year even without help from higher markets or interest rates. Chief Financial Officer Ruth Porat said in a phone interview that the margin was higher than 21 percent in the fourth quarter once the impact of the period’s compensation change is removed.

Morgan Stanley decided to accelerate vesting of deferred pay awarded in previous periods, allowing it to recognize the costs at once instead of over several years. Morgan Stanley has also said it will defer future bonus pools at an average rate of 50 percent, down from about 80 percent for 2013.

Tax Benefit

The charge resulting from that move was more than offset by a tax benefit, the bank’s third of 2014, totaling more than $2 billion for the year. The fourth-quarter gain comes from changing its brokerage subsidiary to a corporation.

JPMorgan Chase & Co. and Citigroup Inc. posted earnings last week that missed analysts’ estimates on bigger-than-expected drops in fixed-income trading revenue. Goldman Sachs posted its lowest full-year trading revenue since 2005.

Morgan Stanley has been shrinking capital dedicated to its fixed-income and commodities division and has sought to eliminate some units. The bank, along with rivals, has also faced congressional and regulatory scrutiny of its ownership of physical-commodities operations.

Rosneft Sale

The bank’s planned sale of its oil-merchanting business to OAO Rosneft fell apart last year after the Russian company was hit with U.S. sanctions. Morgan Stanley has said it still intends to sell the unit.

Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.3 billion in fourth-quarter revenue. That figure, down 4.9 percent from a year earlier, included $488 million from financial advisory, $345 million from equity underwriting and $462 million from debt underwriting.

Morgan Stanley was the third-ranked adviser on global announced mergers and acquisitions in 2014, according to data compiled by Bloomberg. It was the second-ranked underwriter of global equity, equity-linked and rights offerings and sixth-ranked issuer of U.S. bonds, the data show.

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