March 31, 2023

DealBook: Morgan Stanley Shares Fall After Profit Report

The headquarters of Morgan Stanley in New York.Stan Honda/Agence France-Presse — Getty ImagesThe headquarters of Morgan Stanley in Manhattan.

1:22 p.m. | Updated

Shares of Morgan Stanley were down more than 4.5 percent in afternoon trading on Thursday as investors appeared to be unimpressed with the firm’s latest results.

The first-quarter adjusted earnings exceeded analyst estimates. And the financials had some bright spots, notably strong results in the bank’s wealth management division. But the institutional securities division, which includes trading, logged a fall in revenue over year-ago levels, rattling some investors.

Roger A. Freeman, an analyst with Barclays, called Morgan Stanley’s results “a mixed bag.”

Including charges, the firm posted a profit of $1 billion, or 50 cents a share. That compares with a loss of $79 million in the period a year earlier. The results, however, were affected by one-time accounting charges related to the firm’s credit spreads.

Excluding those charges, the firm had a profit of $1.2 billion, or 61 cents a share, a decline from the $1.4 billion reported in the first quarter of 2012. The results topped the estimate of 57 cents a share among analysts polled by Thomson Reuters.

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Morgan Stanley’s adjusted revenue for the three months ended March 31 fell to $8.5 billion from $8.9 billion in the period a year earlier. Analysts had been forecasting revenue of $8.35 billion.

“Morgan Stanley demonstrated solid momentum across the firm this quarter, consistent with the strategic objectives we laid out at the beginning of the year,” the bank’s chief executive, James P. Gorman, said in a statement.

It was a tricky quarter for banks across Wall Street, and most firms posted decent but not eye-popping results. This was clearly the case with Morgan Stanley. The firm posted strong results in wealth and asset management, but institutional securities – its third major division, which includes fixed income and banking – experienced a revenue drop.

The wealth management unit, which has been a big focus for the firm since the financial crisis, has pushed into less-risky lines of business. The division, led by Gregory J. Fleming, posted pretax income from continuing operations of $597 million, up 48 percent from the $403 million reported in the first quarter of last year.

One number investors had been watching – the division’s pretax profit margin – came in at 17 percent, higher than some analysts had projected. Net revenue in wealth management rose to $3.5 billion from $3.3 billion in the first quarter of 2012.

Asset management results were also strong. The unit posted revenue of $645 million in the first quarter, 21 percent higher than in the period a year earlier.

The bank has been working to cut back its fixed income operation, in part because that is where much of the firm’s risk is embedded. Since the financial crisis, some banks have been looking to downsize this business segment and shed risk.

Excluding charges related to the firm’s credit spreads, known as debt valuation adjustment, or DVA, net revenue in institutional securities was $4.4 billion, compared with $5.1 billion in the period a year earlier. Investment banking revenue, however, climbed 15 percent in the quarter, to $1.2 billion.

While the firm’s debt and equity underwriting desks posted yearly revenue gains, most other departments did not fare as well. For instance, revenue from trading commodities and rates fell in the quarter. This decline in revenue from rates trading came despite a decision to take more risk over the last year. In rates and credit spreads, the firm’s quarterly value at risk – a yardstick of how much could be lost in one trading day – was $61 million, up from $46 million in the year-ago period.

Morgan Stanley has been aggressively cutting costs over the last year, and its worldwide work force shrunk by 7 percent, to 55,289.

Return on equity, a measure of how efficiently shareholder money is being deployed, fell to 7.6 percent from 9.2 percent in the year-ago period.

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DealBook: Diageo in Talks to Buy Stake in United Spirits

The Indian billionaire Vijay Mallya, owns a 28 percent stake in United Spirits, in 2007.Carl De Souza/Agence France-Presse — Getty ImagesThe Indian billionaire Vijay Mallya, who owns a 28 percent stake in United Spirits, in 2007.

LONDON – Diageo, the world’s largest spirits company, said on Tuesday that it was in talks to buy a stake in United Spirits of India.

The discussions, which Diageo said might not result in a deal, follow similar talks that it held in 2008 with United Spirits, which has around a 40 percent market share in India.

Diageo, which is based in London, did not say how much of a stake in United Spirits it was looking to acquire. Shares in the British company rose 1.9 percent in morning trading in London.

The Indian billionaire Vijay Mallya owns a 28 percent stake in United Spirits.

Mr. Mallya, who also operates Kingfisher Airlines, has been looking to raise new capital for the Indian carrier for more than a year, and may use the potential sale of a stake in United Spirits to prop up the airline.

Diageo, whose brands include Guinness and Johnnie Walker, is one of many Western beverage companies to turn their attention to the emerging markets.

On Sept. 28, shareholders in Fraser Neave, the Singaporean conglomerate that owns a minority holding in Asia Pacific Breweries, are expected to back Heineken’s $4.6 billion acquisition of the shares in the Asian beer company that it does not already own.

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Bucks Blog: Bank of America Adopts Simpler Checking Account Disclosure

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Bank of America recently became the last of the three biggest United States banks to adopt simplified checking account disclosures, as advocated by an arm of the Pew Charitable Trusts.

Chase and Citibank have already adopted such disclosures, as have roughly a dozen smaller banks and credit unions. Pew’s Safe Checking in the Electronic Age project originally proposed a one-page format, but most banks have had to use at least two pages.

With the addition of Bank of America, five of the 12 largest banks have adopted the simplified format, Susan Weinstock, director of the checking project, said in a statement. “We urge other financial institutions to follow suit,” she said.

The format uses plain language and makes it easier for consumers to see what sort of fees an account charges and to compare various banks’ offerings. Most banks still use lengthy disclosures filled with legal jargon that is difficult for customers to decipher. A Pew report found that disclosure documents among the nation’s 12 largest banks had a median length of 69 pages.

Does your bank use a simplified disclosure?

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DealBook: Bank of America Posts $2.5 Billion Profit, but Mortgage Woes Remain

A Bank of America branch in New York's Times Square. The bank said that it had exceeded analysts' estimates in the second quarter.Stan Honda/Agence France-Presse — Getty ImagesA Bank of America branch in Times Square. The bank said it had exceeded analysts’ estimates in the second quarter.

5:35 p.m. | Updated

Despite reporting better than expected profits Wednesday, the home-loan market remains a money pit for Bank of America.

On Wednesday, the second-largest bank in the United States after JPMorgan Chase, Bank of America said it earned $2.5 billion, or 19 cents a share, compared with analysts’ projections of 14 cents for the quarter, as its expenses dropped and credit conditions improved.

However, the housing woes of the last few years are still taking a toll on the bank. Investors are increasing their demands that Bank of America repurchase soured mortgages, arguing they were improperly underwritten and sold to them in the first place.

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These so-called put-back claims totaled $22.7 billion in the second quarter of 2012, up from $16.1 billion in the first quarter.

Chris Kotowski, an analyst with Oppenheimer, noted that the $22.7 billion figure was more than double total such claims in the second quarter of 2011, when they stood at $9.9 billion.

“It’s not just that it’s going up, it’s going up at an accelerated rate,” Mr. Kotowski said. “It’s hard to know what the ultimate cost will be.”

Those concerns help explain why Bank of America’s stock sank nearly 5 percent to $7.53 a share on Wednesday, even though profits were better than expected.

The bank also reported some weakness in its revenue. For the second quarter, Bank of America’s revenue totaled $22.2 billion, slightly less than expected and below the level in the first quarter this year.

The result was a sign of the pressures big banks face in expanding their business amid a weak economy and tighter regulations. But Bank of America was able to offset those challenges with savings elsewhere.

And the latest figures stand in sharp contrast to Bank of America’s results in the period a year earlier, when huge mortgage-related charges contributed to a loss of $8.8 billion, or 90 cents a share.

Much of the losses from soured mortgages comes from from Bank of America’s disastrous acquisition of Countrywide Financial, a leading subprime lender, in 2008. Bank of America officials say the mortgage defaults stem largely from economic weakness, not failures in terms of how the mortgages were underwritten or packaged and sold to investors.

Bank of America officials add that the bank has nearly $16 billion set aside to cover put-back claims, and also note that the $22 billion figure reflects the total value of the mortgages, not what the bank is likely to have to pay out to investors.

Despite the pressure, Bank of America said the number of mortgages more than 60 days late actually declined in the second quarter, a sign of healthier conditions for borrowers.

Overall credit losses in the second quarter dropped to $1.7 billion from $3.25 billion in the period a year earlier, reflecting what the company said were improving credit conditions for businesses and consumers as well as tighter lending standards.

In addition, the bank raised its projected cost-cutting targets under its “New BAC” restructuring initiative, predicting an additional $3 billion in savings by mid-2015.

Bank of America is in the midst of cutting more than 30,000 workers as New BAC goes into effect. As of June 30, its head count was down 3,228 to 275,460. The bank has 12,600 fewer employees than it did a year ago.

Bank of America’s results were more straightforward than in recent quarters, when one-time gains and losses made it difficult to gauge the bank’s underlying performance.

Also on a positive note, the bank managed to strengthen its balance sheet, which had been a worry of investors last year, when its stock briefly fell below $5 a share. The company says its Tier 1 capital ratio under the Basel III agreements now stands at 8.1 percent, putting it ahead of the company’s earlier goal of 7.5 percent by the end of 2012.

Strengthening the bank’s underlying capital position while slimming down and cutting costs have been prime goals for the bank’s chief executive, Brian Moynihan.

We’re starting to see results from the New BAC program,” Mr. Moynihan said during a call with analysts Wednesday. “We continue to have work to do.”

Profit was also bolstered by so-called reserve releases, when the bank reverses earlier charges for possible credit losses and adds the savings to the bottom line. In this case, of the $2.5 billion profit in the second quarter, $1.9 billion came from reserve releases.

While it was solidly profitable, the company’s global markets unit, which includes much of Bank of America Merrill Lynch, saw revenues and profit drop from the first quarter and the same period a year ago.

The company attributed the slowdown to the economic problems shaking the eurozone, and the anemic economic environment. The global markets unit earned $462 million, down from $911 million in the second quarter of 2011.

“What was driving earnings were reduced credit losses and lowered expenses but revenue growth remains exceptionally weak,” said Shannon Stemm, a banking analyst with Edward Jones Company.

Ms. Stemm said she was also concerned about rising put-back claims.

Government-controlled mortgage giants like Fannie Mae and Freddie Mac want the company to buy back $11 billion in bad mortgages, up from $8.1 billion in the first quarter.

Meanwhile, private investors are seeking $8.6 billion in buybacks, up from $4.9 billion.Insurers are demanding an additional $3.1 billion.

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Bucks Blog: The Exaggerated Impact of Bank Transfer Day

An anti-bank protester in Los Angeles.Agence France-Presse — Getty ImagesAn anti-bank protester in Los Angeles.

The numbers sounded a bit too good to be true — and it turned out that they were. The Credit Union National Association now says that about 214,000 people joined credit unions in the month or so of anti-bank fervor this fall, not the 650,000 it originally estimated. As Gov. Rick Perry of Texas might say: “Oops.”

The credit union association attributed the difference to ambiguous wording in a survey that may have been misinterpreted by some credit unions. The association had asked its members to gauge the impact of Bank Transfer Day, Nov. 5, which had been designated by a grass-roots movement as the day for customers to switch from big banks to credit unions. The event was spurred in part by the backlash against the decision by big banks, including Bank of America, to charge customers a monthly fee for using their debit cards.

The survey wording apparently led some credit unions to report estimates not only of new members, but also of new checking accounts opened by existing members, in the weeks leading up to Bank Transfer Day, an association spokesman, Mark Wolff, said in an e-mail. (The revision was first reported by American Banker).

When the credit union association received its regular monthly data in October (information the association considers reliable, because it has been gathered for 30 years), the discrepancy became apparent. Actual growth now appears to have been 227,000 new members in September, and 214,000 in October, Mr. Wolff said.

“The combination of new members In October and new checking accounts from existing members would put the total close to the 650,000 estimate in our earlier pre-Bank Transfer Day survey,” he said.

The association says it believes credit union members who did not have a credit union checking account were opening the accounts at credit unions, probably because of fee increases at big banks.

The initial survey was “neither scientific nor a representative sample,” Bill Cheney, the association’s president and chief executive, said in a statement. Still, he said, it is clear that consumers made a “significant movement” to credit unions in the weeks leading up to Bank Transfer Day, either by joining credit unions or opening new accounts. The addition of 441,000 new members over two months represents about 75 percent of total credit union membership growth in 2010.

Did you open a new account at a credit union on Bank Transfer Day?

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The Trade: On Wall Street, Some Insiders Express Quiet Outrage

Police cleared the Occupy Los Angeles camp early Wednesday, arresting about 300 protesters.Frederic J. Brown/Agence France-Presse — Getty ImagesPolice cleared the Occupy Los Angeles camp early Wednesday, arresting about 300 protesters. Raids in Philadelphia led to 52 arrests.

Last week, I had a conversation with a man who runs his own trading firm. In the process of fuming about competition from Goldman Sachs, he said with resignation and exasperation: “The fact that they were bailed out and can borrow for free — it’s pretty sickening.”

Though the sentiment is commonplace these days, I later found myself thinking about his outrage. Here is someone who is in the thick of the business, trading every day, and he is being sickened by the inequities and corruption on Wall Street and utterly persuaded that nothing has changed in the years since the financial crisis of 2008.

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Then I realized something odd: I have conversations like this as a matter of routine. I can’t go a week without speaking to a hedge fund manager or analyst or even a banker who registers somewhere on the Wall Street Derangement Scale.

That should be a great relief: Some of them are just like us! Just because you are deranged doesn’t mean you are irrational, after all. Wall Street is already occupied — from within.

The insiders have a critique similar to that of the outsiders. The financial industry has strayed far from being an intermediary between companies that want to raise capital so they can sell people things they want. Instead, it is a machine to enrich itself, fleecing customers and widening income inequality. When it goes off the rails, it impoverishes the rest of us. When the crises come, as they inevitably do, banks hold the economy hostage, warning that they will shoot us in the head if we don’t bail them out.

I won’t pretend this is a widespread view in finance — or even a large minority. You don’t hear this from the executives running the big Wall Street firms; you don’t hear it from the average trader or investment banker. From them, we get self-pity. For every one of the secret Occupy Wall Street sympathizers, there are probably 15 others like Kenneth G. Langone, who, like downtrodden people before him, is trying to reclaim and embrace a pejorative, “fat cat.”

The critics are more often found on the periphery, running hedge funds or working at independent research shops. They are retired, either voluntarily or not. They are low-level executives who haven’t made scrambling up the corporate hierarchy their sole ambition in life. Perhaps their independent status removes the intellectual handcuffs that come with ungodly bonuses. Or perhaps they are able to see Big Money’s flaws because they have to compete with the bigger banks for dollars.

Are these “Wall Streeters”? To civilians, they work on the Street. Bankers at the bulge-bracket firms wouldn’t think they are. But that doesn’t mean they don’t count. They know the financial business intimately.

Sadly, almost none of these closeted occupier-sympathizers go public. But Mike Mayo, a bank analyst with the brokerage firm CLSA, which is majority-owned by the French bank Crédit Agricole, has done just that. In his book “Exile on Wall Street” (Wiley), Mr. Mayo offers an unvarnished account of the punishments he experienced after denouncing bank excesses. Talking to him, it’s hard to tell you aren’t interviewing Michael Moore.

Mr. Mayo is particularly outraged over compensation for bank executives. Excessive compensation “sends a signal that you take what you get and take it however you can,” he told me. “That sends another signal to outsiders that the system is rigged. I truly wish the protestors didn’t have a leg to stand on, but the unfortunate truth is that they do.”

I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong. He sees it as part of the business model.

“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said. “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”

Last week, in a Bloomberg Television event, both Laurence D. Fink, the chairman and chief executive of the mega-money management firm BlackRock, and Bill Gross, the legendary bond investor, evinced some sympathy for the Occupy Wall Street movement.

Over the last several decades, “money and finance have dominated at the expense of labor and Main Street, and so how can one not sympathize with their predicament?” Mr. Gross said, speaking of the 99 percent. “To not have sympathy with Main Street as opposed to Wall Street is to have blinders.”

It’s progress that these sentiments now come regularly from people who work in finance. This is an unheralded triumph of the Occupy Wall Street movement. It’s also an opportunity to reach out to make common cause with native informants.

It’s also a failure. One notable absence in this crisis and its aftermath was a great statesman from the financial industry who would publicly embrace reform that mattered. Instead, mere months after the trillions had flowed from taxpayers and the Federal Reserve, they were back defending their prerogatives and fighting any regulations or changes to their business.

Perhaps a major reason so few in this secret confederacy speak out is that they are as flummoxed about practical solutions as the rest of us. They don’t know where to begin.

Over the next year, maybe that will change. Things are going to be tough on Wall Street. Bonuses will be down. Layoffs are coming. Europe seems on the brink of another financial crisis. Maybe from that wreckage, a leader will emerge.

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Bucks Blog: A Different Skirmish Over A.T.M. Card Fees

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The latest skirmish over card fees is about the fees charged at independently operated A.T.M.’s — those cash machines not affiliated with banks that you see in convenience stores, hotel lobbies and airports.

The National ATM Council Inc., an industry group, and about a dozen individual firms filed a lawsuit on Wednesday against Visa and MasterCard, accusing the payment networks of fixing prices by forcing the independent operators to charge consumers set fees.

The suit, filed in Federal District Court in Washington, seeks class-action status and sheds light on the often-arcane payment arrangements underlying the country’s A.T.M. networks. The suit contends that Visa and MasterCard prevent nonbank A.T.M. operators from charging users discounted access fees, even when consumers use cards that can use alternative, cheaper payment networks.

Visa and MasterCard both declined to comment on the suit.

While MasterCard and Visa are the biggest networks, there are also less well-known networks, like Star and Shazam, that process debit transactions.

A.T.M. operators, the suit says, may charge cardholders an access fee — but only if the same fee is charged, whether the machine performs a Visa or MasterCard transaction or uses another debit network. So even though the Visa and MasterCard networks can be more costly for operators to use, the rules bar an operator from offering consumers a lower fee for A.T.M. transactions not completed over Visa or MasterCard’s networks, said Jonathan Rubin, the lawyer for the operators.

“By restricting their ability to attract customers to lower-cost A.T.M. services through lower prices, the A.T.M. restraints put a competitive straitjacket on A.T.M. operators,” the suit says.

The practice, the suit says, artificially raises the price that consumers pay for A.T.M. services and limits the revenue that A.T.M. operators can earn. If operators could put a sign on their cash machines, for instance, saying the fee is $2 for Visa or MasterCard, but $1 for cards using other networks, the machines could charge lower fees, Mr. Rubin said. The operators, he added, would make more money because more people would use their machines.

“We’re looking for more machines and more competition,” Mr. Rubin said.

There are about 400,000 A.T.M.’s in the United States, and about half are run by nonbank operators, he said.

Do you think consumers would benefit from more competition among payment networks?

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