Morgan Stanley, owner of the world’s largest brokerage, reported first-quarter earnings that beat analysts’ estimates as trading revenue more than doubled from the fourth quarter.
Net income fell 45 percent to $968 million, or 50 cents a share, from $1.78 billion, or 99 cents, a year earlier, the New York-based company said today in a statement. Earnings from continuing operations, excluding a 26-cent loss tied to a Japanese joint venture and a 30-cent tax gain, were 46 cents a share. That compared with the 40-cent average estimate of 14 analysts surveyed by Bloomberg.
Chief Executive Officer James Gorman, 52, is working to convince investors that the firm can rebuild fixed-income trading. Revenue from that business rebounded from the final three months of 2010, and declined 35 percent from the year-earlier period, when Wall Street posted the best fixed-income quarter since the financial crisis. The firm’s equity-trading revenue last quarter jumped to the highest since 2008.
“They were clearly better than expected,” David Hilder, an analyst with Susquehanna Financial Group LLLP, said in a Bloomberg Television interview. “The equity-trading gains were nice.”
Mitsubishi UFJ Morgan Stanley Securities Co., which is 40 percent owned by Morgan Stanley, said today it will cut jobs and raise capital after posting a loss of 145 billion yen ($1.8 billion) last year that was fueled by wrong-way bets on fixed- income products. President Fumiyuki Akikusa plans to resign after the investment bank’s loss for the year ended March 31, according to two people with knowledge of the matter who declined to be identified because the information isn’t public.
“While the loss at our joint venture with MUFG is disappointing, we remain strongly committed to the Japanese market and our strategic partners at MUFG,” Gorman said in the statement. “This loss does not impact the progress we are making in pursuing our own strategic priorities.”
Goldman Sachs Group Inc. fell 1.3 percent on April 19 in New York trading after first-quarter profit declined 21 percent and analysts said the bank relied on unpredictable investment gains to beat estimates. JPMorgan Chase & Co. exceeded estimates last week as investment-banking revenue jumped 33 percent from the fourth quarter. Both companies are based in New York.
Morgan Stanley has fallen 12 percent since Gorman took over at the beginning of 2010, the third-worst performance in the 28- member Standard & Poor’s 500 Diversified Financials Index. The stock rose to $26.55 in New York trading at 7:50 a.m. from $26.04 at the close yesterday. The stock was down 4.3 percent this year through yesterday, after falling 8.1 percent in 2010.
Revenue at Morgan Stanley dropped to $7.64 billion from $9.07 billion a year earlier. Book value per share fell to $31.45 from $31.49 at the end of December. The firm’s return on equity from continuing operations, a measure of how well it reinvests earnings, was 6.2 percent.
In the first quarter, Morgan Stanley’s revenue from fixed- income sales and trading was $1.77 billion, compared with negative revenue of $29 million in the fourth quarter and $2.72 billion in the first quarter of 2010. Excluding gains or losses from its own credit spreads, fixed-income revenue was $1.93 billion, compared with $4.3 billion at Goldman Sachs and $5.2 billion at JPMorgan.
Gorman said in February that his “No. 1” priority is turning around the firm’s fixed-income trading unit, hoping to capture a 2 percentage point market-share gain this year. Excluding gains and losses tied to their own debt, Morgan Stanley had about a 6 percent market share in 2010 among 11 of the largest U.S. and European banks, according to data compiled by analysts at JPMorgan and Nomura Holdings Inc.
Gorman replaced fixed-income trading head Jack DiMaio with Ken deRegt, and the firm hired Glenn Hadden from Goldman Sachs as global head of interest rates. Morgan Stanley is looking to gain market share in rates, where it increased headcount by about 20 percent, and foreign exchange, where it added 40 percent more people, Gorman said in February.
In equities trading, Morgan Stanley’s first-quarter revenue rose to $1.7 billion, up 57 percent from the fourth quarter and 20 percent higher than a year earlier. The unit’s revenue compares with $2.3 billion at Goldman Sachs and $1.4 billion at JPMorgan.
Morgan Stanley generated $1.01 billion in revenue from investment banking in the quarter, up 14 percent from a year earlier. That included $385 million from financial advisory, $285 million from equity underwriting and $338 million from debt underwriting.
Morgan Stanley was the second-ranked adviser on mergers announced in the quarter, as well as the fourth-ranked underwriter of stock offerings, according to data compiled by Bloomberg. The firm finished 2010 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.
Global wealth management posted pretax income of $348 million, up from $278 million in the first quarter of 2010. The division’s pretax profit margin fell to 10 percent from 12 percent in the fourth quarter. The unit had $11.4 billion of net new assets.
Asset management reported a pretax gain of $127 million, compared with $174 million in the previous year’s period.
Compensation and benefits decreased 2 percent from the year-earlier quarter to $4.33 billion, or 57 percent of the firm’s overall revenue. The ratio was higher than in the first quarter of 2010, when the bank set aside 49 percent of revenue.
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 weaker-than-anticipated trading markets. The average earnings estimate fell 20 cents in the past four weeks.
Morgan Stanley bought a controlling stake in a joint venture with Citigroup Inc.’s Smith Barney unit, giving it a retail brokerage with more than 18,000 advisers and $1.67 trillion in client assets as of Dec. 31. The bank said last month it will proceed with plans to buy the rest of the joint venture after the Federal Reserve’s review of its capital plan.
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