Ghost of Smith Barney? Brokerage fuels big 4Q for Morgan Stanley

Company books $550M profit in quarter; wealth management unit leads the way

Jan 18, 2013 @ 8:03 am

Morgan Stanley (MS), the top global equity underwriter last year, reported earnings that beat analysts' estimates as revenue from the retail brokerage climbed.

Fourth-quarter profit was $507 million, or 25 cents a share, compared with a loss of $250 million, or 15 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting charges tied to the firm's own debt, profit was 45 cents a share, beating the 27-cent average estimate of 24 analysts surveyed by Bloomberg.

Chief Executive Officer James Gorman, 54, is grappling with higher capital requirements and the firm's failure to post revenue growth in the first nine months of last year. His plan to reduce costs through job cuts and pay deferrals helped fuel a 28 percent jump in the stock price in the past two months.

“It's doing a good job in getting wealth management to start to grow quite meaningfully,” Christopher Wheeler, a bank analyst at Mediobanca SpA in London, said in a Bloomberg Radio interview before results were released. “They'll be looking really hard at what they can do to make sure they don't dilute what they have in terms of really strong franchises while still trying to rebuild this fixed-income business.”

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 it back. The firm booked a $2.3 billion charge in the third quarter as its credit spreads tightened.

Share Performance

Morgan Stanley climbed 1 percent yesterday to $20.75, leaving the stock up 8.5 percent this month through yesterday. The shares advanced 26 percent in 2012, after falling 44 percent the previous year. They are 30 percent below where they traded when Gorman took over at the beginning of 2010.

Daniel Loeb's Third Point LLC said this month it bought a stake in the firm, betting the shares may double as brokerage margins improve and management devises a “bold fix” for the bond-trading business.

Finding that solution falls to Colm Kelleher, who took control of the entire investment-banking and trading division this year as his co-head, Paul J. Taubman, 52, retired from that role. Kelleher, 55, is trying to boost the firm's returns by cutting costs and reducing the amount of capital used by the trading business.

Job Cuts

Morgan Stanley is eliminating 1,600 jobs from its investment-banking division and support staff, after reducing the number of employees by about 4,200 in the first nine months of 2012. It's also deferring all bonuses for top earners, which will reduce compensation costs recognized in 2012.

The company plans to cut risk-weighted assets within fixed- income and commodities from $320 billion as of June 30 to $255 billion by the end of 2014, Chief Financial Officer Ruth Porat said in September. The firm may continue cutting assets for another five years to arrive at less than $200 billion by 2017, Howard Chen, a Credit Suisse Group Inc. analyst, wrote in a December note, citing a meeting with Gorman.

Gorman's plan to boost returns also relies on higher profitability from the wealth-management division. Greg Fleming, who runs the unit, has vowed to raise its pretax margin to the “mid-teens” by the middle of next year, and said last month that the increase can be obtained through cost cutting as integration expenses decline. The figure was 13 percent in the third quarter, excluding a one-time charge.

Morgan Stanley finished integrating its brokerage unit with Citigroup Inc.'s Smith Barney in July. The firm, which owns 65 percent of the joint venture, planned to ask the Federal Reserve for approval to buy the entire remaining stake this year, a person briefed on the bank's thinking has said.

Morgan Stanley was the second-ranked equity underwriter in the quarter, according to data compiled by Bloomberg. It was also the No. 3 adviser on global announced mergers and acquisitions and the fifth-ranked underwriter of U.S. bonds, the data show.

--Bloomberg News--

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