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--

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Jul 10

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Cameras roll at Best Places to Work for Financial Advisers' awards

Advisory firm winners on the top 50 InvestmentNews list of Best Places to Work for Financial Advisers explain the significance of this recognition at the Chicago awards event.

Latest news & opinion

Supreme Court decision likely to prevent brokers from filing class-action lawsuits

However, it likely won't bar employees from filing 401(k) lawsuits against their employers.

5th Circuit denies states' second attempt to defend DOL fiduciary rule

The three-judge panel split again, 2-1, in deciding not to take another look at the motion to intervene by California, New York and Oregon.

Pass-through tax strategies for business-owner clients

Shifting business structure, changing filing status and spinning off equipment are examples of ways business owners can take advantage of the deduction.

Finra anticipates oversight role for SEC advice rule

CEO Robert Cook says one area for examination could be the proposed requirement that brokers act in the best interests of their clients.

IBDs with the most CFPs

Here are the 10 independent broker-dealers that employ the most certified financial planner professionals.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print