DealBook: Morgan Stanley Shares Slump as Earnings Miss Estimates

Eric Thayer/ReutersMorgan Stanley’s headquarters in Manhattan. The bank is transforming into a smaller, safer company that takes fewer risks.

5:30 p.m. | Updated

As the whipsawing markets batter the trading operations of many banks, Morgan Stanley is feeling the pain more acutely.

Although the firm reported on Thursday that it had swung to a $564 million profit in the second quarter from a loss one year ago, its revenue plunged 24 percent as the firm was hurt by a decline in revenue from trading bonds, currencies and commodities.

Wall Street banks have suffered through what has been a largely inhospitable environment, wracked with economic uncertainty and the European debt crisis. But Morgan Stanley has been required to navigate that landscape while also working to transform itself, shedding riskier businesses while building its steadier wealth-management arm.

The firm was also forced to post $2.9 billion in additional money to back its trades in the quarter, following a two-notch downgrade of its credit rating by Moody’s Investors Service. The firm had faced a potential cut of up to three levels, which would have put it just two positions above junk-bond status.

Related Links

• Documents: Morgan Stanley’s news release

In response, Morgan Stanley has taken several steps to clamp down on expenses and headcount. James P. Gorman, Morgan Stanley’s chairman and chief executive, said that the firm expected to shrink its employee rolls by 7 percent by the end of the year.

It is seeking to cut other expenses, including by locating more staff in cheaper locations like Baltimore and Glasgow, Scotland.

“Although global economic uncertainty remains a headwind, we are proactively positioning the firm for success,” Mr. Gorman said in a statement. “We continue to be focused on taking the necessary steps to deliver strong returns for our shareholders.”

Still, the damage that market conditions have inflicted was especially notable this quarter. Morgan Stanley’s profit amounted to 29 cents a share, widely missing the 43 cents a share that analysts surveyed by Thomson Reuters had expected.

The results did not impress investors. Morgan Stanley’s stock fell as much as 7 percent on Thursday before recovering slightly to finish the day down 5.3 percent to $13.25 a share.

Morgan Stanley’s fixed-income trading revenue plummeted 60 percent from the year-ago period and 70 percent from the first quarter, a drop that far outstrips what other competitors have reported.

Excluding accounting gains tied to the value of its debt, the company reported that revenue fell to $6.6 billion from $9 billion in the period a year earlier. Including adjustments, revenue fell to $6.95 billion from $9.2 billion in the year-ago quarter.

And return on equity from continuing operations, a prominent measure of profitability, was only 3.5 percent. Goldman Sachs, one of the firm’s top competitors, said this week that its own 5.4 percent return on equity was “unacceptable.”

By far the most notable problems lay in fixed-income trading, where Mr. Gorman is trying to move the firm from more complicated and capital-intensive products to simpler offerings. Morgan Stanley reported $770 million in adjusted trading revenue.

Ruth Porat, Morgan Stanley’s chief financial officer, said in a telephone interview that the results stemmed from the “challenging macro backdrop,” as well as clients pulling back while waiting for Moody’s to complete its review of bank credit ratings. That the agency took longer than expected to announce its results drew out the pain, she added.

“As the month wore on, clients took a wait-and-see attitude,” she said. “Time was not our friend.”

Other businesses suffered as well. Advisory revenue was halved from the year-ago period, to $263 million, as fewer corporations pursued mergers or sales of stocks and bonds. Mr. Gorman still highlighted the division’s performance, however, pointing to big mandates like leading Facebook‘s initial public offering.

(The firm has defended its work taking Facebook public, but the social networking company’s stock has fallen 24 percent since the I.P.O. in May.)

One business did show some bright spots: global wealth management, which now includes all of the Morgan Stanley Smith Barney venture that the firm took over from Citigroup. The unit reported a 23 percent gain in pretax income, to $393 million, although net revenue declined slightly.

This post has been revised to reflect the following correction:

Correction: July 19, 2012

Article source: http://dealbook.nytimes.com/2012/07/19/morgan-stanley-swings-to-profit-but-revenue-falls/?partner=rss&emc=rss