By Saabira Chaudhuri And Justin Baer
Morgan Stanley reported fourth-quarter results that fell short
of analyst estimates as revenue was hit by the same trading
slowdown that hammered rivals and progress stalled on a key measure
in the firm's wealth management business.
The Wall Street firm's shares fell about 1.7% in early trading,
as both per-share earnings and revenue fell short of analysts'
expectations. "Not their strongest showing," Evercore ISI analyst
Glenn Schorr wrote Tuesday in a research note summarizing Morgan
Stanley's performance.
The bank reported a profit of $1.04 billion, up from $84 million
a year earlier. Stripping out one-time items and accounting
adjustments, per-share earnings fell to 39 cents from 50 cents.
Analysts polled by Thomson Reuters had expected earnings of 48
cents a share.
The bank has made progress in recent years, boosting its wealth
management business and shrinking its fixed-income trading
operation to make overall results more predictable.
This quarter, the flurry of one-time items, and their
timing--during a quarter in which almost every large bank had
already disappointed investors--appeared to set the stage for the
firm's final push toward hitting long-standing return targets.
Among other items, the latest quarter's results include a tax
gain of $1.4 billion and a compensation expense of $1.1 billion,
while the year-earlier quarter included a pretax legal expense of
$1.2 billion.
"There were a number of complicating elements, but this was an
important quarter as we continue to put residual issues from the
financial crisis behind us and take strategic actions that set us
up well for the future, " Morgan Stanley Chief Financial Officer
Ruth Porat said in an interview with The Wall Street Journal on
Tuesday.
On a conference call reviewing the results, analysts pressed
Morgan Stanley executives for more detail on how and when the firm
would reach its goals for return on equity, a closely watched
measure of banks' profitability. The firm reiterated it would get
to at least 10%, up from 5.4% for the fourth quarter and 8.9% for
the year, though the executives didn't give investors a timetable
for hitting that mark.
Revenue for the quarter fell 1% to $7.76 billion, while revenue
excluding accounting adjustments dropped 2.5% to $8 billion, coming
in below analyst estimates for $8.08 billion.
Revenue from equities trading, an important profit driver for
Morgan Stanley, rose to $1.63 billion from $1.5 billion a year
earlier, but came in lower than what rival Goldman Sachs Group Inc.
reported on Friday.
Morgan Stanley also joined Goldman, Citigroup Inc., Bank of
America Corp. and J.P. Morgan Chase & Co. in posting lower
revenue from fixed income, currencies and commodities trading, or
"FICC," an important business for big banks that has seen difficult
trading conditions.
Morgan Stanley's adjusted FICC revenue fell 14% from a year
earlier to roughly $599 million, driven by lower revenue in credit
products and commodities.
"Our trading businesses, in particular fixed income and
commodity, sales, and trading, were clearly not immune to the
unfavorable market environment," Morgan Stanley Chairman and CEO
James Gorman said on a call with analysts.
Ms. Porat told The Journal that the firm officials "are being
very clinical about how we use resources towards our FICC
business," she said. In its presentation, the firm talked about
continuing to reduce the amount of risk-weighed assets the business
uses.
The firm's more stable wealth management business turned in
stronger results. Revenue in that division rose 2.4% from a year
earlier and edged up 0.8% from the prior quarter to $3.8
billion.
But the wealth management unit's pretax profit margin, a closely
watched efficiency metric, was 19% in the fourth quarter, flat with
a year earlier and down from 22% reported in the third quarter.
The firm reported higher compensation costs in the division,
which helped drive the margin lower. Morgan Stanley officials had
previously said they are targeting a pretax profit margin of 22% to
25% by the end of 2015.
Adjusting for the higher compensation expense, the pretax profit
margin was "north of 21%," said Ms. Porat, adding that Morgan
Stanley "is well on track" to hit its target by the end of this
year.
Overall, Morgan Stanley logged lower expenses during the
quarter, benefiting from the absence of 2013's large fourth-quarter
legal charge. However, the bank reported a 28% rise in compensation
costs, part of which comes from its decision to start paying out a
bigger slice of employees' bonuses immediately and to speed up the
vesting period for certain cash deferrals.
In the latest quarter, Morgan Stanley logged a legal charge of
$284 million tied to what it described as several legacy
residential mortgage and credit crisis related matters.
"Litigation from crisis is not resolved, it remains a headwind,"
said Ms. Porat, who declined to comment on whether the expense was
an accrual towards a settlement on the issues.
Overall, noninterest expense was $7.9 billion, down 2% from the
year earlier but up 18% from the third quarter.
Investment banking revenue, meanwhile, fell 6.6% from a year
earlier to $1.46 billion as a decline in underwriting overshadowed
gains in advisory revenue.
Advisory revenue of $488 million increased from $451 million a
year earlier on higher levels of M&A activity. Equity
underwriting revenue fell 17% to $345 million from $416 million a
year earlier, while fixed income underwriting revenue decreased
6.7% to $462 million from $495 million in the prior-year quarter,
reflecting lower loan fees.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and
Justin Baer at justin.baer@wsj.com
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