May 19, 2024

DealBook: Morgan Stanley Profit Falls 48%

Morgan Stanley, which like its peers is still feeling the aftereffects of the financial crisis, posted first-quarter earnings on Thursday of $736 million, down 48 percent from the period a year earlier, and it recorded a $655 million loss from a Japanese joint venture.

While Morgan Stanley’s quarterly profit of 50 cents a share is down from the first quarter of 2010, when the company earned 99 cents a share, it beat analysts’ expectations of 35 cents, according to Thomson Reuters.

Morgan Stanley’s chief executive, James P. Gorman, said he was “disappointed” with the loss in the Japanese unit, but emphasized in a statement that the company “continued to strengthen our client franchise and delivered solid results across many of our businesses.”

A number of its major units, including global wealth management, experienced a rise in net revenue. In fixed income and commodities sales and trading, however, net revenue fell to $1.8 billion from $2.7 billion in the period a year earlier.

The firm’s return on equity, an important measure of profitability, was 6 percent in the quarter compared with 16 percent in the period a year earlier. This number has fallen sharply across the industry in recent years.

In the aftermath of the financial crisis, Wall Street banks are required by regulators to limit leverage and keep more capital on hand in case of another economic shock — all of which is weighing on profit in a sluggish economic environment.

Morgan Stanley’s results come just two days after Goldman Sachs posted profit of $1.56 a share, which was down 21 percent from the period a year earlier but nearly double analysts’ expectations. Citigroup and JPMorgan Chase have also recently reported earnings, and both lamented a tough economic environment.

Like its rivals, Morgan Stanley has had a difficult time recovering from the financial crisis. Mr. Gorman, who moved into the bank’s top spot in January 2010, has tried to retool the business, with a flurry of management changes and a hiring spree to bolster its trading business. Even so, the company’s stock price is lower than when Mr. Gorman took over.

Morgan’s stock closed at $26.04 on Wednesday. Shares of the investment bank moved up in premarket trading on news of better-than-expected results.

Mr. Gorman has been weighed down by a number of issues, many of which he inherited. Among the biggest: a dividend that the firm must pay to the Mitsubishi UFJ Financial Group of Japan. Morgan Stanley’s relationship with Mitsubishi UFJ was struck during the credit crisis, when Morgan accepted a $9 billion lifeline from the bank. The bank just renegotiated its stake with Mitsubishi, a move that will cuts its $800 million dividend payments, but dilute shareholders.

At the same time, Morgan Stanley set up two joint ventures with Mitsubishi to increase its presence in Japan. One of those initiatives, the one Morgan Stanley does not control, took a loss for the quarter.

The results in fixed income and commodities were clearly a disappointment, too, with net revenue down 33 percent. Morgan said the weak performance reflected a drop in credit products, which was partly offset by a jump in interest rate products. That helped drag down the overall institutional securities group, where revenue fall to $3.59 billion from $5.34 billion in the period a year earlier.

The one bright spot in institutional securities was investment banking, which reported first-quarter revenue of $1.2 billion, up 15 percent from the period a year earlier.

Asset management posted net revenue of $626 million for the period, down 4 percent.

In the global wealth management division, which includes Morgan Stanley Smith Barney, revenue increased to $3.4 billion from $3.1 billion in the period a year earlier.

In the first quarter, the firm set aside $4.3 billion for compensation, 56 percent of its net revenue. This number is widely watched on Wall Street, as Morgan Stanley has come under fire in recent years from shareholders for its compensation levels. In 2010, Morgan Stanley paid 51 percent of its revenue to employees, down from 62 percent in 2009.

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