Morgan Stanley's Earnings Drop on Sharp Slide in Fixed-Income Revenue -- Update
April 18 2016 - 12:50PM
Dow Jones News
By Justin Baer and Peter Rudegeair
Morgan Stanley's quarterly profit tumbled by 53% after jitters
about the global economy limited clients' appetite to trade or make
deals.
Net income dropped to $1.13 billion, or 55 cents a share, from
$2.39 billion a year earlier. Analysts polled by Thomson Reuters
had expected a per-share profit of 46 cents.
Revenue tumbled to $7.79 billion, shy of the $7.87 billion
forecast by analysts.
Morgan Stanley and other big banks are muddling through a steep
slump in their debt-trading business. The downturn prompted the
firm to cut jobs from the unit, which has weighed down Morgan
Stanley's return on equity, a key measure of profitability.
Return on equity fell to 6.2% from 13.5% a year earlier,
excluding an accounting adjustment. Morgan Stanley executives have
pledged to increase that to between 9% and 11% by the end of 2017,
a target that appears a bit more elusive given this year's slow
start.
"I'll give Morgan Stanley credit for stepping up and putting out
it out there," said Jeff Harte, an analyst with Sandler O'Neill +
Partners LP. "But they run the risk of overpromising and
under-delivering for things that are out of your control."
Morgan Stanley's executives based the target on ongoing cost
cuts, regulators' blessing to return capital to shareholders
through stock buybacks and dividend payments, and revenue gains of
4% a year. Revenue tumbled 21% in the first quarter.
"That's the perils of putting out a target is you get asked
about it every time, every quarter, until you finally get there,"
James Gorman, Morgan Stanley's chairman and chief executive, said
during a conference call with analysts. "But we did put it out for
2017."
Mr. Gorman said it was too early to second-guess the ROE goal,
and that Morgan Stanley would "take additional appropriate actions"
to shed expenses if business conditions don't improve.
"We also recognize we cannot control the environment in which we
operate, but we are focused on what we can control, such as
expenses," he said.
Investors' attention will now turn to the Federal Reserve's
battery of bank stress tests, an annual process that determines how
much excess capital financial firms can return to shareholders,
analysts said.
Trading revenue fell 34% to $2.69 billion from $4.08 billion in
the first quarter of 2015, a sharper drop than some peers.
Revenue from trading in debt, currencies and commodities fell
56% to $873 million, while the revenue from equity trading dropped
10% to $2.06 billion.
In an interview, Morgan Stanley Chief Financial Officer Jonathan
Pruzan said January and February were turbulent months for its
trading business, but that it saw improvement in March and so far
in April. "The environment is clearly better, client activity is up
a bi...[but] we're going to see bouts of volatility."
The drop in trading revenue, especially at the firm's
fixed-income business, wasn't as sharp as many analysts and
investors had feared heading into April. Bank stocks have rallied
in the past week in part on relief that the most dire predictions
about the first quarter proved unfounded.
The volatile markets also conspired to weaken investment-banking
activity in the first quarter, hurting a division that had been a
bright spot last year.
Investment-banking revenue fell 16% to $990 million from $1.17
billion in the year-ago quarter. Fees from advising on mergers and
other deals rose 25% to $591 million, while revenue on stock and
bond underwriting slipped 43% to $399 million.
Mr. Pruzan said that the bank's pipeline for mergers and
acquisitions remains healthy as muted economic growth and the rise
of activist investors continue to spur deals, even in a tough
market backdrop. "A lot of the themes we saw that drove activity
last year still exist," Mr. Pruzan said.
Revenue in Morgan Stanley's wealth-management arm was $3.67
billion, compared with $3.83 billion a year ago. In Morgan
Stanley's investment-management division, revenue fell 29% to $477
million due to losses on its private-equity and real-estate
funds.
The money-management arm also struggled with markdowns on
private-equity investments in the quarter.
Morgan Stanley's expenses fell 14% to $6.05 billion from $7.05 a
year earlier. Cost from employee pay and benefits fell 19% to $3.68
billion, or 47% of revenue.
The firm's shares have tumbled 19% this year as investors
fretted over Morgan Stanley's ability to weather the slowdown.
Write to Justin Baer at justin.baer@wsj.com and Peter Rudegeair
at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
April 18, 2016 12:35 ET (16:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Morgan Stanley (NYSE:MS)
Historical Stock Chart
From Feb 2024 to Mar 2024
Morgan Stanley (NYSE:MS)
Historical Stock Chart
From Mar 2023 to Mar 2024