Morgan Stanley, the top global equity underwriter this year, reported earnings that beat analysts’ estimates as revenue from fixed-income trading climbed from a year earlier.
Morgan Stanley posted a loss of $1.01 billion, or 55 cents a share, compared with a profit of $2.2 billion, or $1.15, a year earlier, the New York-based company said in a statement. Excluding accounting adjustments, profit was 28 cents a share. Twenty-two analysts surveyed by Bloomberg estimated 25 cents.
Chief Executive Officer James Gorman, 54, is trying to improve returns at the brokerage unit and shrink the fixed- income trading division to reduce capital demands. The bank had the lowest first-half return on equity of the 10 largest U.S. lenders and is trading at two-thirds of its liquidation value, compared with 96 percent at Goldman Sachs Group Inc.
“We saw an elevation of the fixed-income trading environment in the results of Goldman Sachs and other banks,” Douglas Ciocca, CEO of Kavar Capital Partners LLC in Leawood, Kansas, which manages about $250 million in assets, said before earnings were released. “Morgan Stanley could be in a good position to grab a piece of that.”
The accounting charge is known as a debt valuation adjustment, or DVA. It stems from increases in the value of the company’s debt, under the theory it would be more expensive to buy back the debt and extinguish the interest payments. Morgan Stanley booked a $3.4 billion gain in the year-earlier quarter as yields on its debt rose compared to Treasuries.
Citigroup Inc. climbed 5.5 percent on Oct. 15 in New York trading after reporting a 64 percent increase in trading revenue. Goldman Sachs said Oct. 16 that its third-quarter trading revenue jumped 26 percent from a year earlier. Both companies are based in New York.
Morgan Stanley climbed 3.5 percent yesterday to $18.49, leaving the stock up 22 percent this year. The shares fell 44 percent in 2011, the biggest decline since 2008. They are 38 percent below where they traded when Gorman took over at the beginning of 2010.
Gorman has pledged to shrink the fixed-income trading division, which requires a majority of the firm’s regulatory capital and has trailed revenue of rivals since the financial crisis. Morgan Stanley plans to cut risk-weighted assets within fixed-income and commodities, overseen by Colm Kelleher, from $320 billion on June 30 to $255 billion by the end of 2014, Chief Financial Officer Ruth Porat said last month.
Part of the reduction could come from selling a stake in its commodities unit. Qatar is considering investing in the unit, Prime Minister Sheikh Hamad bin Jassim Al Thani said last week. The commodities business, which includes trading in futures contracts and buying and selling physical commodities, may be affected by the Volcker rule, which limits banks’ ability to trade for their own account.
Investors are also looking for progress in the firm’s wealth-management division, after the bank bought more of its brokerage joint venture from Citigroup. Greg Fleming, who runs the business, vowed to raise the unit’s pretax margin to the “mid-teens” by the middle of next year. The figure was 12 percent in the second quarter.
Fleming met with financial advisers across the U.S. last quarter after disruptions caused by a new technology and operations system sparked complaints. Morgan Stanley finished integrating its brokerage unit with Smith Barney in July, an effort that included developing a technology system for all financial advisers. Some brokers were frustrated by a more cumbersome process to enroll new clients and less automation with some distributions.
Morgan Stanley now owns 65 percent of the brokerage after paying $1.89 billion for an additional 14 percent stake in September following a two-month fight over the value of the venture. The two banks agreed on a valuation for the purchase of the remaining 35 percent stake, which Morgan Stanley must buy all of by June 2015. The firm will probably ask the Federal Reserve for approval to purchase the rest next year, according to a person briefed on the bank’s thinking.
Morgan Stanley was the second-ranked equity underwriter in the quarter, according to data compiled by Bloomberg. It was also the second-ranked adviser on global announced mergers and acquisitions and the fifth-ranked underwriter of U.S. bonds, the data show.
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