Morgan Stanley Misses Estimates as Trading Declines (Update1)

Morgan Stanley Misses Estimates as Trading Declines (Update1)
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Jan. 20 (Bloomberg) -- Morgan Stanley, owner of the world’s largest brokerage, reported a 35 percent increase in fourth- quarter earnings, falling short of analysts’ estimates as trading revenue declined.

Net income rose to $836 million, or 41 cents a share, from $617 million, or 29 cents, a year earlier, the New York-based company said today in a statement. Earnings from continuing operations, excluding a 17-cent gain on the sale of a stake in China International Capital Corp. and a tax gain of about 6 cents, were 20 cents a share. That compared with the 28-cent average estimate of 13 analysts surveyed by Bloomberg.

Chief Executive Officer James Gorman, 52, is seeking to boost trading results and increase the brokerage’s profitability after the stock underperformed Goldman Sachs Group Inc. and most of its bigger rivals last year. Morgan Stanley’s post-crisis strategy of relying more on its 18,000 brokers and less on risk- taking has yet to lure investors to the stock, which slid 8.1 percent in 2010.

“They need to be given some time to work out some of the issues, particularly in a model that’s 180 degrees from what was being encouraged and emphasized a couple years ago,” said Douglas Ciocca, managing director at Renaissance Financial Corp. in Leawood, Kansas, which manages $2 billion in assets including Morgan Stanley shares. Ciocca spoke before earnings were released.

Tax Gain

The company said it had a $95 million tax gain in the fourth quarter. Based on the average number of diluted shares outstanding, that equates to about 6 cents a share.

Morgan Stanley rose to $28.15 in New York trading at 8:01 a.m. from $27.75 at the close on the New York Stock Exchange yesterday. The stock was up 2 percent this year through yesterday.

Goldman Sachs fell 4.7 percent yesterday after posting fixed-income trading revenue that dropped 48 percent from a year earlier. Citigroup Inc., which reported earnings on Jan. 18, missed analysts’ estimates as revenue from trading stocks and bonds each fell more than 40 percent from the third quarter. JPMorgan Chase & Co. beat estimates last week as investment- banking revenue jumped 22 percent from the third quarter. All three companies are based in New York.

Book Value

Revenue at Morgan Stanley rose to $7.81 billion from $6.84 billion a year earlier. Book value per share climbed to $31.49 from $31.25 at the end of September. The firm’s return on equity from continuing operations, a measure of how well it reinvests earnings, was 5.4 percent.

In the fourth quarter, Morgan Stanley’s revenue from fixed- income sales and trading was negative $29 million. Excluding gains or losses from its own credit spreads, fixed-income revenue was $813 million, compared with $1.64 billion at Goldman Sachs and $2.88 billion at JPMorgan.

“While we made progress in building out our fixed-income business through investments in both people and technology, there is more to be done to drive revenue and market share growth,” Gorman said in the statement.

In equities trading, Morgan Stanley posted fourth-quarter revenue of $1.08 billion, up 17 percent from the third quarter and 40 percent from a year earlier. The unit’s revenue, which was $1.18 billion excluding debt-valuation adjustments, compares with $1.13 billion at JPMorgan.

Morgan Stanley generated $1.52 billion in revenue from investment banking in the fourth quarter.

Wealth Management

Global wealth management posted pretax income of $390 million, up from $231 million in the fourth quarter of 2009. Asset management reported a pretax gain of $356 million, compared with a $37 million pretax loss in the previous year’s period.

Compensation and benefits increased 10 percent to $4.06 billion in the quarter from the previous quarter, or 52 percent of the firm’s overall revenue. The ratio was higher than in the first three quarters, when the bank set aside 50 percent of revenue.

Gorman shook up his top management ranks as he entered his second year as CEO. Last week, he named Greg Fleming to replace Charles Johnston as president of the retail brokerage in addition to Fleming’s role in leading the asset-management business. Johnston will be vice chairman of Morgan Stanley Smith Barney until he retires at the end of 2011.

Jack DiMaio

Gorman also picked Ken deRegt, the firm’s chief risk officer, to take over for Jack DiMaio in attempting to turn around the fixed-income trading unit. DiMaio is leaving the firm. Morgan Stanley earlier this month named Jim Rosenthal as its chief operating officer to succeed Thomas Nides, who left to take a position in the U.S. State Department.

The bank said previously it recorded a gain from the sale of its 34.3 percent holding in CICC to four investors. Morgan Stanley, which invested $35 million in CICC when it was established in 1995, is forming a joint venture with China Fortune Securities Co.

The firm also booked a pretax gain of $96 million on the sale of its stake in Invesco Ltd., which it acquired through the divestiture of its retail asset-management business last year. The bank sold the stake for $664 million in November, and it carried the equity stake at a value of $568 million as of Sept. 30, according to a regulatory filing.

The firm took a $126 million charge from the sale of its controlling interest in FrontPoint Partners LLC, a hedge fund it bought in 2006. Morgan Stanley said in November it expected a pretax loss of $70 million on the sale, which leaves it with a minority stake.

Bond Spreads

Revenue was lowered by charges related to the narrowing of the firm’s own credit spreads. The company booked $5.1 billion of gains in fiscal 2008 as its bond spreads widened, then reversed them in 2009 as markets improved and spreads tightened. Overall debt-valuation costs for 2010 were $873 million.

Seven analysts cut their per-share earnings estimates in the past four weeks, with some citing weak trading markets. The average earnings estimate fell 11 cents in the past four weeks.

Morgan Stanley was among banks that submitted a capital plan to the Federal Reserve earlier this month as lenders seek permission to raise dividends and buy back shares. In April 2009, the firm cut its dividend to 5 cents from 27 cents.

The bank is also making changes to comply with the new Dodd-Frank financial-regulation law passed last year. It plans to break off its largest proprietary-trading group, Process Driven Trading, to create an independent advisory firm by the end of 2012, and will have to trim the $4.5 billion of capital it has in private-equity, real-estate and hedge funds.

Cost Controls

Gorman is trying to control expenses after the firm posted its first per-share loss as a public company in 2009 and paid out 62 percent of revenue in compensation. Morgan Stanley has told some employees to expect investment banking and trading bonuses to decline 10 percent to 30 percent from 2009, two people briefed on the matter said last month.

The firm finished the year as both the top underwriter of equity offerings and the top adviser on announced mergers and acquisitions globally for the first time since Bloomberg began compiling data in 1999.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net