Morgan Stanley, owner of the world's largest brokerage, reported a third-quarter loss of 7 cents a share after writing down a stake in Revel Entertainment LLC, an Atlantic City casino project.
Morgan Stanley, owner of the world’s largest brokerage, reported a third-quarter loss of 7 cents a share after writing down a stake in Revel Entertainment LLC, an Atlantic City casino project.
Morgan Stanley had a profit of $131 million before preferred dividends, compared with earnings of $757 million, or 38 cents, in the third quarter of 2009, the New York-based company said today in a statement. Earnings from continuing operations were 5 cents a share, which included a 12-cent tax gain and a 30-cent loss from charges related to changes in the firm’s credit spreads.
Chief Executive Officer James Gorman, 52, is trying to gain market share in fixed-income trading and improve his brokerage’s profitability as business slows. Revenue fell 15 percent from a year earlier as investors traded fewer stocks and companies raised less from equity offerings.
“Our results in aggregate clearly do not reflect the true potential of Morgan Stanley’s global client franchise and I am not satisfied with our overall performance,” Gorman said in the statement.
Goldman Sachs Group Inc. yesterday reported earnings that beat analysts’ estimates as lower costs and higher investment- banking revenue cushioned a decline in trading. Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, both reported at least a 15 percent drop in trading revenue from the third quarter of 2009.
Revel Stake
Morgan Stanley fell to $25.02 from $25.39 in New York Stock Exchange composite trading yesterday. The stock is down 14 percent this year through yesterday.
Morgan Stanley said in April it would sell its stake in Revel, the unfinished casino resort in Atlantic City. The bank said at the time that the sale may result in a “substantial” loss of its $1.2 billion investment. The firm booked a $932 million loss on Revel in the first quarter, and a $229 loss in the third quarter.
The average estimate of 22 analysts surveyed by Bloomberg was for earnings of 21 cents a share, though some analysts included the credit-spread calculation in their figures and others excluded it.
Fifteen analysts cut their per-share earnings estimates in the past four weeks, with some citing weak trading markets. Trading volume on U.S. stock exchanges in the third quarter was down 18 percent from a year earlier. The average earnings estimate fell 26 cents in the past four weeks.
Compensation, Hiring
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 halted hiring at its investment-banking group for the rest of 2010, a person briefed on the decision said in September.
Revenue at Morgan Stanley fell to $6.78 billion from $8.47 billion a year earlier. Book value per share climbed to $31.25 from $29.65 at the end of June. The firm’s return on equity from continuing operations, a measure of how well it reinvests earnings, was 0.8 percent.
In equities trading, Morgan Stanley posted third-quarter revenue of $925 million, down 35 percent from the second quarter, when it led U.S. banks in that category. The unit’s revenue, which was $1.07 billion a year earlier, compares with $1.86 billion at Goldman Sachs and $1.14 billion at JPMorgan.
Credit Spreads
Revenue was lowered by $731 million of 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.
Morgan Stanley generated $1.01 billion in revenue from investment banking.
Global wealth management posted pretax income of $281 million, up from $280 million in the third quarter of 2009. Asset management reported a pretax gain of $279 million, compared with a $124 million pretax loss in the previous year’s period.
Compensation and benefits decreased 25 percent to $3.69 billion in the quarter, or 54 percent of the firm’s overall revenue. The ratio was higher than in the first two quarters, when the bank set aside 49 percent of revenue.
Basel Framework
Analysts and investors are looking for guidance regarding the effect of the so-called Basel III framework on the bank’s capital ratios. Goldman Sachs Chief Financial Officer David Viniar said on a conference call yesterday that his bank would have had about $750 billion of risk-weighted assets at the end of June under Basel III, compared with the $451 billion it reported under Basel I.
Morgan Stanley’s Tier 1 common ratio may drop to about 6.5 percent, below the 8.5 percent regulators will likely require, under new rules proposed by the Basel Committee on Banking Supervision, Richard Staite, an analyst at Atlantic Equities in London, said in a research note last month.
At a September meeting in Basel, Switzerland, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply. Morgan Stanley may not buy back shares until 2012 because they won’t initially meet regulators’ minimum capital levels, Roger Freeman, an analyst at Barclays Capital, said in a note that month.
Morgan Stanley pushed out its profit-margin goals for the brokerage in July, blaming the May 6 market crash for scaring away retail investors. Gorman had said earlier this year that the unit’s pretax margin would increase to 15 percent by the end of this year and top 20 percent by the end of 2011. The margin was 8 percent in the first half of the year.
The firm is the second-ranked adviser on announced mergers and acquisitions this year, according to data compiled by Bloomberg. The bank was also the third-ranked underwriter of global equity offerings and the seventh-ranked underwriter of U.S. bonds, according to data compiled by Bloomberg.
