March 28, 2024

DealBook: Morgan Stanley Announces a Buyback, and Its Shares Rise

Morgan Stanley's headquarters in New York.Mark Lennihan/Associated PressMorgan Stanley’s headquarters in New York. The firm posted a 42 percent rise in profit and said it would buy back part of its stock.

Morgan Stanley shares rose more than 4 percent on Thursday after the firm announced it planned to buy back a chunk of its own stock.

News that the firm had received approval from the Federal Reserve to repurchase $500 million worth of its stock was good for shareholders, whose stake in the company has been diluted in recent years as the firm issued millions of shares to pay employees. This dilution has weighed on the stock, and it was trading in the teens earlier this year.

The stock rose about 4.4 percent, or $1.16, to close at $27.70, a level it has not hit since 2011. It is the first buyback Morgan Stanley has undertaken since the financial crisis and comes after the firm’s decision to buy the remaining stake of its wealth management business, a move James P. Gorman, the firm’s chairman and chief executive, has heralded as “transformational.”

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Morgan Stanley received approval from regulators in June to buy the rest of its wealth management division, a joint venture it formed with Citigroup during the crisis. Since then, the firm has been working to diversify its earnings, moving away from riskier businesses like trading and into wealth management, which offers steady, albeit lower returns. Its ability to purchase all of that division gave it full control of the operation and the full share of the profits.

Mr. Gorman told analysts that the firm was careful to have the wealth management purchase in order — and paid for — before it started spending money on stock buybacks.

The other good news for shareholders was the firm’s second-quarter earnings, which came in slightly ahead of analysts’ expectations.

The firm reported that second-quarter profit applicable to Morgan Stanley’s common shareholders rose 42 percent, to $802 million, or 41 cents a share, compared with $564 million, or 29 cents a share, in the period a year earlier. Overall net income was $980 million, compared with $591 million in the period a year earlier.

The results, however, were affected by two big charges, one related to Morgan Stanley’s credit spreads and the other to its recent purchase of the remaining stake of the wealth management business. Stripping out those charges, the firm had a profit of $872 million, or 45 cents a share. That beat the estimates of analysts polled by Thomson Reuters, which had projected a profit of 43 cents a share.

Morgan Stanley’s revenue, excluding those charges, rose to $8.3 billion in the second quarter from $6.6 billion in the period a year earlier.

The results were driven by decent performances in most of its business units, notably wealth management and equity and debt trading. Morgan Stanley is coming off what was a weak second quarter of 2012 and is also enjoying what seems to be a better operating environment for all banks.

Morgan Stanley is the last big financial institution to report second-quarter earnings, and results have been generally strong as lenders seem to be benefiting from a pickup in the American economy. Goldman Sachs, for instance, reported that its net income doubled, beating analysts’ expectations handily.

At Morgan Stanley, wealth management, which is led by Gregory J. Fleming, was a big focus for analysts on the quarterly conference call.

That unit, with 16,321 financial advisers, posted net revenue of $3.5 billion, up more than 10 percent. Its pretax profit margin, a widely watched figure on Wall Street, came in at 18.5 percent. That margin, which previously had been around 17 percent, was higher than the firm’s expectations.

Institutional securities, which houses Morgan Stanley’s banking and trading operations, posted net revenue, excluding the debt charge, of about $4.2 billion, up about 40 percent from a year earlier.

The firm experienced a solid increase in revenue from various segments in this department, including debt and equity underwriting, investment banking, and currency and commodities trading.

The fixed-income sales and trading unit reported that adjusted revenue rose to $1.2 billion from $771 million in the period a year earlier. This year’s performance was slightly below what analysts were hoping for.

In the second quarter, there was a sudden and sharp rise in interest rates after the Federal Reserve indicated it might wind down its bond purchase program, which has helped the economy recover from the financial crisis.

Ruth Porat, the bank’s chief financial officer, told analysts that the firm reduced the risk it was taking trading interest rate products.

While the bank’s second-quarter results were a marked improvement over those in the period a year earlier, the firm is still producing a return on equity, excluding the two charges, of just 5.6 percent. This is up from 2.1 percent in the period a year earlier but still well below what it costs the bank to simply cover its debt expenses and other capital costs. To do that, it needs to achieve a return on equity, an important measure of profitability, of closer to 10 percent.

 

Article source: http://dealbook.nytimes.com/2013/07/18/morgan-stanley-profit-rises-42-percent/?partner=rss&emc=rss

DealBook: Growth in Emerging Markets Lifts Citigroup’s Profit by 42%, Topping Expectations

Citigroup's headquarters in Manhattan. The bank's executives have been working to cut costs, including eliminating 11,000 jobs.Mario Tama/Getty ImagesCitigroup’s headquarters in Manhattan. The bank’s executives have been working to cut costs, including eliminating 11,000 jobs.

8:37 p.m. | Updated

Capitalizing on its emerging market business — a welcome antidote to the lackluster United States economy — Citigroup handily beat expectations on Monday as net income surged 42 percent in the second quarter.

The nation’s largest banks are bedeviled by a challenging trifecta — sluggish demand for loans, a stagnant American economy and a raft of financial regulations that have eroded profits. Thanks to its international securities business, though, Citigroup was able to sidestep much of the pain from a challenging consumer banking landscape.

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Citigroup, the nation’s third-largest bank by assets, reported a profit of $4.18 billion, or $1.34 a share, compared with $2.95 billion, or 95 cents a share, in the period a year earlier. Revenue rose 11 percent, to $20.48 billion.

Excluding a $477 million gain from a valuation adjustment on Citigroup’s debt, the bank reported earnings of $1.25 a share. The performance exceeded analysts’ profit expectations of $3.55 billion, or $1.19 a share, on revenue of $19.76 billion.

“Our businesses performed well during the quarter and these results are well balanced through our products and geographies, especially in the emerging markets, where growth is being challenged,” Michael L. Corbat, the chief executive of Citigroup, said in a statement on Monday.

Under Mr. Corbat’s leadership, the sprawling bank has hitched its hopes for growth to emerging markets, especially in Asia and Latin America. Citigroup is working to whittle down extraneous businesses that do not conform with its global operations, where its securities and lending operations dwarf those of many of its United States rivals. As part of that push, the bank has shed $18 billion worth of assets. Citigroup also sold the remainder of its stake in the Morgan Stanley Smith Barney brokerage joint venture. So far, the strategy is working well.

The bank’s international business is a “distinct positive,” Tom Lewandowski, a financial services analyst with Edward Jones, said.

More than 50 percent of Citigroup’s revenue comes from outside of North America. Despite simmering concerns about less-than-stellar economic growth in emerging markets, profit within Citigroup’s international consumer banking business grew by 4 percent, to $826 million. Revenue in those units swelled by 5 percent, to $4.7 billion.

Even at its more tepid, growth in emerging markets has exceeded that in the United States. In Mexico, for example, economic growth was not as robust as expected, Citigroup said. “Mexico shocked everyone,” John C. Gerspach, the bank’s chief financial officer, said in a conference call on Monday. And while a slowdown in China, which reported a slump in second-quarter gross domestic product on Monday, could spread to other Asian economies, Citigroup’s business has not been hit yet.

In fact, Citigroup reported gains across its emerging markets business, especially in its securities business. In Asia, demand for credit grew, nudging the volume of loans up 10 percent for the quarter. Mr. Gerspach said that the bank “did a very good job of managing our business in the emerging market this quarter.”

Still, Citigroup’s emerging markets business does not entirely inoculate the bank from broader challenges facing the United States industry. On Friday, JPMorgan Chase and Wells Fargo reported declines in mortgage banking revenue, eroded in part by a lull in mortgage refinancing. A sharp uptick in interest rates has caused the refinancing boom to sputter.

And continually rising rates could reduce borrowers’ appetite for refinancing existing mortgages or buying a house. Within Citigroup’s consumer banking unit, profit fell slightly by 1 percent, to $1.95 billion. As fewer consumers fell behind on their bills, Citigroup was able to empty some of the reserves — approximately $228 million — for the losses. While it received a boost from that improvement in credit quality, Citigroup is still grappling, like many of its large peers, with skittish American consumers who remain skeptical of taking on new debt.

The wariness was clear in Citigroup’s American lending operations. “The U.S. consumer is still going through a period of deleveraging,” Mr. Gerspach said.

Adding to the uncertainty in the United States are new capital rules introduced by regulators last week. Since the financial crisis of 2008, regulators have been steadily introducing new requirements aimed at bolstering capital levels that could help Wall Street withstand market turbulence.

Under the new rules, called the so-called leverage ratio, regulators are pushing for banks to hold more capital as a percentage of their assets. Banks have two months to comment on the rules. Mr. Gerspach cautioned that the requirements could undercut the bank’s ability to compete with its international rivals. Already, the leverage ratio for Citigroup’s holding company was around 4.9 percent, hovering just below the 5 percent requirement that will go into effect by 2018.

“We would all be better if there was a level playing field around the world,” he said.

A bright spot for Citigroup was its securities and investment banking business, as revenue surged by 25 percent, to $6.8 billion. Within fixed income, revenue swelled by 18 percent, to $3.37 billion. Revenue from stock trading rose 68 percent, to $942 million. Revenue from underwriting and advisory business was up by 21 percent, as well.

Investors are closely watching the bank’s quarterly reports during the first year under the leadership of Mr. Corbat, who took the reins in October after the ouster of Vikram S. Pandit. Michael E. O’Neill, the bank’s forceful chairman, pushed Mr. Pandit out in favor of his handpicked successor, Mr. Corbat.

Building on the path outlined by Mr. Pandit, Mr. Corbat has promised to continue cutting costs. Toward that goal, Citigroup reduced assets in its Citi Holdings unit by 31 percent in the second quarter, to $131 billion. In an encouraging sign for Citigroup, losses within the unit that houses a morass of soured assets fell to $570 million, from $910 million in the period a year earlier. Losses were lowest since Citigroup created the unit in 2009, after the financial crisis.

Even as Mr. Corbat has aggressively moved to reduce the bank’s costs, operating expenses rose 1 percent, to $12.1 billion. As one of his first initiatives after taking over as chief executive, Mr. Corbat announced plans to eliminate 11,000 jobs.

Shares of Citigroup rose $1, or 2 percent, to $51.81.

Article source: http://dealbook.nytimes.com/2013/07/15/citigroup-profit-climbs-42-percent/?partner=rss&emc=rss