June 17, 2019

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

Wealth Matters: Technology’s Impact on the Value of Financial Advice

But is the technology good enough to replace guidance from financial advisers? Or is technology actually good for advisers because they can use it to do their jobs better?

Several new reports look at what technology will mean for an adviser, who, at his or her best, protects people from their worst investment ideas. And that brings up a corollary question: What will this trend, and enormous investment, in technology mean for the clients, the people whose money is at stake?

It seems almost heretical to propose that technology will not make an existing service better. But after reading the reports and talking to advisers who have embraced technology, I was not sure that this emphasis was going to be better for clients.

The report from Accenture looked at how younger clients sought relationships through technology and how advisers had to be available to provide it.

“When we talk to firms, they think social media is a new thing, and they’re trying to control the risk of it,” said Alex Pigliucci, global managing director of the wealth and asset management business at Accenture. “I see these tools as an advantage today. They’re not something to plan for in the next five to 10 years.”

The Out-of-Sync Advisor,” a report by Deloitte, imagined technology bringing clients who were managing their own money back to advisers and then allowing those advisers to give people with a couple of hundred thousand dollars the type of high-quality advice reserved for people with hundreds of millions of dollars.

Ed Tracy, leader of the wealth management and private banking practice at Deloitte, said this would be possible only if all the clients’ financial information was already in the system so the advisers could spend their time together talking about the clients’ goals.

Fidelity’s annual broker and adviser sentiment index, released late last year, tried to put a dollar amount on all of this: technology-adept advisers who were focused on clients in their 30s and 40s managed, on average, $8 million more than colleagues focused on baby boomers. Their clients also had slightly larger accounts. (Not in the data was how technology contributed directly to this.)

But is there any practical value to investors in this push for more technology? In some areas, yes. In others, it remains to be seen.

Patrick O’Connor, senior vice president for wealth, retirement, portfolio solutions at Raymond James, said some of the best technological innovations reminded him of a recent visit to his new dentist.

Instead of pointing to a murky X-ray and telling him to floss, his dentist wheeled around a monitor that showed his teeth — and the problems with them — from various angles. A bit more brushing here and flossing there, and the image changed to show healthier teeth.

“She was giving me more ownership of my teeth,” Mr. O’Connor said. “I’ve been much more diligent about flossing and paying attention to those areas. Before, I would have ignored her. I’d been lectured to for 10 years.”

Technology, he said, can do much the same thing for investors, showing them how they are doing and the consequences of their spending and saving. The technology also becomes the bearer of bad news, not the adviser. “Instead of saying, ‘Sorry you’re in the red,’ I become the facilitator in getting you from the red to the green,” he said.

And technology can help clients reduce mundane and time-consuming tasks and increase the amount of time they can talk about the things that matter most to them.

“If someone had my data, understood my goals, had buckets in my portfolio and I knew if I was on track or off track and they only spent three hours a year with me, I’d feel a lot better than I would with someone I sat down with who said, ‘Tell me what’s going on,’ ” Mr. Tracy said.

Article source: http://www.nytimes.com/2013/04/13/your-money/technologys-impact-on-the-value-of-financial-advice.html?partner=rss&emc=rss

Market Edges Up, Lifting Dow to 9th Consecutive Gain

The stock market rose slightly Wednesday, but enough to lift the Dow Jones industrial average to its ninth consecutive gain, its longest winning streak in more than 16 years.

The Dow edged up 5.22 points, to 14,455.28, for another nominal record close since March 5, when it surpassed its previous high, set in 2007. The Dow is up 10.3 percent this year.

The Dow’s last nine-day winning streak occurred in May 1996. The following November, in the early days of the technology boom, it gained for 10 days straight.

This year, demand for stocks has been propelled by optimism that the housing market is recovering and that companies have started to hire. Strong company earnings and continuing stimulus from the Federal Reserve also are making stocks more attractive.

Stocks overcame an early loss on Wednesday, having edged lower at the start of trading despite an unexpectedly strong increase in consumer spending last month.

Americans spent at the fastest pace in five months in February, increasing retail spending 1.1 percent compared with January, the Commerce Department reported Wednesday. Economists had forecast a gain of 0.2 percent, according to FactSet.

The failure of the market to pick up directly after the report suggests that the bar has risen for investors as stocks have rallied.

“As the market rises, so do expectations,” said Bill Stone, chief investment strategist at PNC Wealth Management. “So, even if you get good numbers, you don’t necessarily get the market to go up.”

The Standard Poor’s 500-stock index rose 2.04 points, or 0.1 percent, to 1,554.52. The S. P. 500 has gained 9 percent this year and is less than 11 points from its record close of 1,565.15 in October 2007.

The Nasdaq composite index rose 2.80 points, or 0.1 percent, to 3,245.12. It remains well below its record close of more than 5,000, reached at the height of the dot-com boom in 2000.

Stocks of retailers rose after the retail sales report. Kohl’s jumped $1.49, or 3.2 percent, to $48.82 and Best Buy gained 67 cents, or 3.3 percent, to $20.96.

Brian Gendreau, a strategist at the Cetera Financial Group, said that even if markets dipped in coming weeks, the trend of rising company earningswas likely to push stocks higher in the longer term. Companies have reported 7.7 percent earnings growth for the fourth quarter, the third straight quarter of gains, S. P. Capital IQ said.

“Earnings growth has been quite strong. Corporations have found a way to make money,” Mr. Gendreau said. “New products, new markets, cost savings. I don’t believe that is going to stop any time soon.”

Among the stocks on the move, Spectrum Pharmaceuticals plunged $4.64, or 37 percent, to $7.79 after it said sales of its drug Fusilev could fall by more than half this year.

Netflix rose $10.25, or 5.6 percent, to $192.36 after it said that it was adding a feature that would allow subscribers in the United States to automatically swap movie and television show recommendations with their friends on Facebook.

Dole dropped $1.06, or 9 percent, to $10.67 after its fourth-quarter results fell short of analysts’ expectations. Dole cited lower banana prices in North America.

The clothing retailer Express fell 60 cents, or 3.2 percent, to $18.25 after its earnings report disappointed investors. Michael Weiss, the company’s chief and chairman, told analysts that customer traffic was “down noticeably” from last year.

In the bond market, interest rates showed little change. The price of the Treasury’s 10-year note slipped 1/32, to 99 26/32, leaving its yield unchanged at 2.02 percent.

Article source: http://www.nytimes.com/2013/03/14/business/economy/shares-slip-despite-economic-data.html?partner=rss&emc=rss

DealBook: Credit Suisse Returns to Profit and Plans More Cost Cuts

Brady Dougan, chief of Credit Suisse.Steffen Schmidt/European Pressphoto AgencyBrady Dougan, chief of Credit Suisse.

4:40 p.m. | Updated

LONDON — Credit Suisse said on Thursday that it had swung to a profit in the fourth quarter of last year from a loss in the period a year earlier, and announced that it would cut more costs than previously planned.

The bank, Switzerland’s second-biggest after UBS, said net income for the final three months of 2012 was 397 million Swiss francs ($436 million); it posted a loss of 637 million francs ($700 million) in the fourth quarter of 2011.

Credit Suisse, based in Zurich, said it would increase its cost-cutting target by $440 million, to $4.83 billion, by the end of 2015.

“Going into 2013, revenues have so far been consistent with the good starts we have seen to prior years,” the chief executive, Brady W. Dougan, said in a statement, adding that profitability was “further benefiting from the strategic measures.”

On Tuesday, UBS reported a loss of $2.1 billion for the fourth quarter because of costs to settle legal matters, including its role in a global rate manipulation scandal. Both Swiss banks have reacted recently to stricter capital rules introduced by Swiss regulators by revamping their investment banking operations.

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While UBS’s shares jumped after it said in October that it would eliminate 10,000 jobs, Credit Suisse investors were far less impressed with changes that the bank announced in November.

Those changes, announced by Mr. Dougan, included appointing a new co-head of investment banking and merging the bank’s asset management division into its wealth management and private banking unit.

The new structure is meant to help Mr. Dougan fulfill his pledge to save billions of francs by 2015, and to make the lines between wealth management and investment banking clearer.

Credit Suisse said on Thursday that 21 percent of its net revenue was from the collaboration among its different divisions. The bank also reduced its total compensation by 5 percent in 2012 from a year earlier.

Private banking and wealth management had a pretax profit of $1 billion in the quarter, up from $585 million in the period in 2011.

Investment banking had a pretax profit of $327 million, a turnaround from a loss of $1.54 billion in the fourth quarter of 2011, as it made more money from debt sales and trading.

Credit Suisse said it proposed to pay a dividend of 10 centimes in cash and 65 centimes in shares for 2012.

Article source: http://dealbook.nytimes.com/2013/02/07/credit-suisse-returns-to-profit-eyes-more-cost-cuts/?partner=rss&emc=rss

DealBook: UBS Posts $2 Billion Loss Tied to Legal Settlements

The Swiss bank UBS in Zurich.Michael Buholzer/ReutersThe Swiss bank UBS in Zurich.

LONDON – The Swiss bank UBS on Tuesday reported a large loss for the fourth quarter, driven by costs to settle legal matters, including its role in a global rate-manipulation scandal.

UBS booked a loss of 1.9 billion Swiss francs ($2 billion), a sharp drop compared with a profit of 323 million francs in the period a year earlier. The loss was slightly smaller than some analysts had predicted, and UBS said it planned to buy back 5 billion francs of its debt to reduce its financing costs.

“The bank’s performance reflects the effects of the challenging operating environment during the year, the costs involved in reshaping the business and the actions we took to address the challenges we faced,” the bank chairman, Axel Weber, and the chief executive, Sergio P. Ermotti, wrote in a letter to shareholders. “While progress was made on many issues during 2012, many of the underlying challenges remain at the start of the new year.”

Since taking the helm of UBS in 2011, Mr. Ermotti has been seeking to reduce costs by eliminating jobs, shrinking capital-intensive trading operations and repairing the bank’s reputation after a string of scandals.

In December, the bank agreed to pay $1.5 billion in fines for its role in a scheme that involved other banks and brokers to manipulate the London interbank offered rate, or Libor, and other benchmark interest rates. The settlement came after an earlier fine for charges it had helped some clients avoid United States taxes.

In October, UBS began eliminating about 10,000 jobs as it retreated from some business lines to focus more on its successful wealth management operation. Its investment banking operation was hurt in 2011 by a $2.3 billion trading scandal that cost the job of the chief executive at the time, Oswald Grübel.

The bank said on Tuesday that it “remains on track” with plans to reduce exposure to risky assets and cut costs. UBS said it had achieved 1.4 billion francs in net cost savings since the revamp started in mid-2011. As a result, it plans to increase its dividend payout for 2012 by 50 percent, to 0.15 francs a share.

UBS also announced it would change the way it pays bonuses to link them closer to the firm’s performance. Bankers would have to give up deferred compensation if the bank’s capital ratio fell under a certain level.

The investment banking unit had a pretax loss of 557 million francs in the last three months of 2012 compared with a profit of 114 million francs in the period a year earlier.

UBS’s wealth management unit reported that net new money inflows declined to 2.4 billion francs from 3.1 billion francs in the fourth quarter of 2011, after Western European clients withdrew funds amid the crisis in the euro zone.

Article source: http://dealbook.nytimes.com/2013/02/05/ubs-posts-2-billion-loss-on-libor-fines/?partner=rss&emc=rss

DealBook: Morgan Stanley’s $481 Million 4th-Quarter Profit Beats Estimates

The headquarters of Morgan Stanley in New York.Shannon Stapleton/ReutersThe headquarters of Morgan Stanley in New York.

10:12 a.m. | Updated

Morgan Stanley reported adjusted earnings for the fourth quarter on Friday that beat analyst estimates, driven by gains in wealth management and investment banking.

Including charges, the firm had a fourth-quarter profit of $481 million, or 25 cents a share. That compares with a per-share loss of 15 cents in the year-ago period.

The results, however, show continued weakness in firm’s fixed income franchise and were affected by one-time accounting charges related to the firm’s credit spreads. Excluding those charges, the firm had a profit of 45 cents a share. That handily beat the estimates of analysts polled by Thomson Reuters, which had estimated a profit of 27 cents a share.

When factoring in the charges, Morgan Stanley’s revenue came in at $7 billion in the fourth quarter, up 23 percent from the year-ago period. But for the full year, the firm’s revenue dropped 19 percent, to $26.1 billion, a significant drop that contrasts with peers. Goldman Sachs, for instance, said its annual revenue rose of 19 percent in 2012.

As a result, Morgan Stanley was forced to increase the percentage of revenue it allots for compensation: a full 60 percent of its 2012 revenue, or $15.62 billion, went to pay employees. This compares with 2011, when just 51 percent of revenue was allotted for compensation and benefits.

The high ratio could raise eyebrows on Wall Street. In 2010, Morgan Stanley’s chief executive, James P. Gorman, said that the firm’s compensation rate of 62 percent that year was a “historic high” that no one on his management team “will ever see again.” He indicated that the rate should be no higher than 50 percent.

Still, Mr. Gorman said on Friday that Morgan Stanley’s turnaround strategy, which has been underway since the financial crisis when the firm’s operations were badly damaged, was working. “We believe Morgan Stanley is at a turning point,” he told analysts on a conference call to discuss earnings.

Mr. Gorman has been working since the financial crisis to retool Morgan Stanley by shifting its focus away from potentially riskier businesses like trading and into steadier, less capital-intensive areas like wealth management. While he has notched some successes, the company still faces challenges.

Notably, the firm has reduced the size of its fixed-income department in the wake of ratings downgrades and new regulatory requirements, both of which have forced it to hold more capital against riskier trading activities, reducing profitability. This month, it laid off 1,600 employees, many of them in fixed income.

But there were areas that had notable revenue growth. Excluding the debt charge, institutional securities, which included fixed income and banking, had revenue of $3.5 billion, compared with $1.9 billion in the same quarter in 2011.

The fixed-income sales and trading unit reported adjusted revenue of $811 million for the fourth quarter, compared with a loss of $493 million in the year-ago period. Investment banking revenue also did well, increasing 25 percent, to $1.23 billion, in the fourth quarter.

Wealth management was another bright spot in the quarter, posting net revenue of $3.46 billion, up from $3.22 billion this time last year. Its pretax margin was 17 percent, which is higher than many analysts had anticipated.

Investors seem to like results, driving the company’s stock up nearly 6 percent, to $21.98, in morning trading.

Earlier this week, Goldman Sachs posted profit of $5.60 a share, which outpaced analyst expectations. Citigroup, Wells Fargo and JPMorgan Chase have also recently reported stronger year-over-year earnings.

Article source: http://dealbook.nytimes.com/2013/01/18/morgan-stanleys-4th-quarter-profit-of-481-million-beats-estimates/?partner=rss&emc=rss

Top Executives End Opposition to Higher Taxes

Before Tuesday’s about-face, the Business Roundtable had insisted that the White House extend Bush-era tax cuts to taxpayers of all income brackets, but the executives’ resistance crumbled as pressure builds to find a compromise for the fiscal impasse in Washington before the end of the year.

“We recognize that part of the solution has to be tax increases,” David M. Cote, chief executive of Honeywell, said on a conference call with reporters. “That’s the only thing that allows a reasonable compromise to be reached.”

Even as the Fortune 500 leaders announced their shift, the White House continued to work behind the scenes to woo some of Wall Street’s most powerful financiers — a group that had largely abandoned President Obama in his bid for a second term after supporting him in 2008.

After seeking out corporate leaders from industrial companies last month, the White House has intensified outreach to Wall Street in December.

On Wednesday, several hedge fund managers, including Daniel Och, the billionaire founder of Och-Ziff Capital Management, will meet with Valerie Jarrett, a top adviser to the president, and members of the White House economic team.

Last Monday, White House officials sat down with a more than half a dozen top bankers and financiers, including Gary D. Cohn, president of Goldman Sachs, and Greg Fleming, head of wealth management at Morgan Stanley.

The differing strategies — highly public meetings with corporate America and private arm-twisting with Wall Street — both appear to be aimed at winning popular support for higher taxes on the wealthy. The trade-offs being roundly fought over in Washington, like what government programs may be cut and which entitlements may be spared, are less important in this effort to muster highly compensated chieftains whose support for tax increases will provide cover for Congressional Republicans wary of being seen as too quick to compromise on higher tax rates.

What’s more, the political symbolism of some of the wealthiest Americans’ saying they support higher taxes on the rich takes a bit of the sting out of the idea of raising rates, for both Democrats and Republicans. Indeed, by appealing to both camps and enlisting their support, President Obama hopes to neutralize potential critics, according to allies of the president on Wall Street.

President Obama’s supporters cited the example of Frederick W. Smith, the chief executive of FedEx. Last week, Mr. Smith signaled he was not angered by higher tax rates for the wealthiest individuals, a centerpiece of President Obama’s plan to reduce the deficit and a key sticking point for Republicans in Congress.

“If people who didn’t support the president believe the president is acting reasonably, they’re going to put pressure on the other side,” said Marc Lasry, a longtime supporter of the president who runs Avenue Capital. “You need both sides to be reasonable.”

For example, Mr. Lasry invited the real estate tycoon Barry Sternlicht, a onetime Obama supporter who raised money for Mitt Romney in the last election cycle, to the White House last week. Mr. Lasry, who has $13 billion under management, including $1.3 billion of his own money, is among a small group of Wall Street figures who stuck with the president before the election, even as those like Mr. Sternlicht deserted him.

This core group met with President Obama on Nov. 16, and included Tony James, president of the Blackstone Group, as well as Roger Altman, a Democratic stalwart who is executive chairman of Evercore Partners, and Robert Wolf, a longtime UBS executive who recently began his own firm, 32 Advisors.

Also in attendance were Blair W. Effron, co-founder of Centerview Partners, and Mark T. Gallogly, a Blackstone veteran who founded Centerbridge Partners in 2005.

Catherine Rampell contributed reporting.

Article source: http://www.nytimes.com/2012/12/12/business/top-executives-end-opposition-to-higher-taxes.html?partner=rss&emc=rss

DealBook: Less Trading at Morgan Stanley; Revenue Slips 24%

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Morgan Stanley's headquarters in Manhattan. The bank is transforming into a smaller, safer company that takes fewer risks.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

While many banks are getting battered by the trading slump, Morgan Stanley is feeling the pain more acutely.

On Thursday, the bank reported a 24 percent drop in revenue for the second quarter, driven by a significant decline in bond, currency and commodity trading.

Wall Street banks have faced a largely inhospitable environment in recent years, racked by economic uncertainty, the European debt crisis and a new regulatory system. But Morgan Stanley has been trying to navigate the market while also working to transform itself by shedding riskier businesses and building its steadier wealth management arm.

The bank had started to show signs of improvement in previous quarters, but then it got buffeted by the recent trading downdraft. For the quarter, Morgan Stanley reported that earnings came in at 29 cents a share, widely missing the 43 cents a share that analysts had expected. It posted a loss in the same period of 2011.

The bank also faced the repercussions from a recent credit rating downgrade. The bank was forced to post $2.9 billion in additional money to back its trades in the quarter, after Moody’s Investors Service cut its rating by two notches.

The results spooked investors. On a day when the market was up, shares of Morgan Stanley fell as much as 7 percent before recovering slightly to finish the day down 5.3 percent at $13.25.

Glenn Schorr, an analyst at Nomura, wrote in a research note that it was “hard to pick out too many positives” from the firm’s quarterly results.

And Howard Chen of Credit Suisse described the quarter in a report to investors as “weak and disappointing.”

As the bank looks to bolster its profit, Morgan Stanley has taken steps to clamp down on expenses and head count. On Thursday, James P. Gorman, Morgan Stanley’s chairman and chief executive, said that the firm expected to shrink its employee base by 7 percent by the end of the year.

The firm is also seeking to cut other expenses, including by moving some staff to cheaper locations like Baltimore and Glasgow, and being more selective in filling positions.

“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.”

Even so, the bank faced headwinds, particularly in trading. In fixed income, Morgan Stanley has tried to simply its offerings, moving away from complicated and capital-intensive products that can prove risky in tough environments.

But the “challenging macro backdrop” weighed on profits, Ruth Porat, the bank’s chief financial officer, said in a telephone interview.

With the European debt crisis heating up, investors became increasingly uncertain and trading volume plummeted. Revenue in fixed income fell by 60 percent in the second quarter, to $770 million, a drop that outstrips competitors.

Morgan Stanley is also dealing with the fallout from the credit downgrade. In February, Moody’s put big banks on warning, with Morgan Stanley facing a potential three-notch downgrade.

Some clients pulled back, as they waited for Moody’s to complete its review, Ms. Porat said.

It only added to the bank’s pain that the rating agency delayed the results, she added. In June, Moody’s ended up cutting the firm’s rating by two levels.

“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.

Still, Mr. Gorman highlighted the division’s performance, 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 initial public offering in May.)

Morgan Stanley did have one area that posted a gain, the global wealth management group that now includes Morgan Stanley Smith Barney. The unit reported a 23 percent gain in pretax income, to $393 million, although net revenue declined slightly.

The weakness is reducing its profitability. The bank’s return on equity now stands at 3.5 percent, down from 12.2 percent in 2010. Goldman Sachs, one of the firm’s competitors, said this week that its 5.4 percent return on equity was “unacceptable.”

Revenue in Morgan Stanley’s second quarter was $6.95 billion, down from $9.2 billion.


This post has been revised to reflect the following correction:

Correction: July 19, 2012

An earlier version of this post misstated the drop in Morgan Stanley’s revenue as 35 percent, not 24 percent.

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

DealBook: Morgan Stanley Shares Slump as Earnings Miss Estimates

Morgan Stanley's headquarters in Manhattan. The bank is transforming into a smaller, safer company that takes fewer risks.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.

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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

An earlier version of this post misstated the drop in Morgan Stanley’s revenue as 35 percent, not 24 percent.

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

DealBook: Morgan Stanley to Raise Stake in Brokerage Venture to 65%

Morgan Stanley's headquarters in Manhattan.Richard Drew/Associated PressMorgan Stanley‘s headquarters in Manhattan.

Morgan Stanley’s chief executive, James P. Gorman, has made it clear he wants to get his hands on the brokerage business it owns with Citigroup. Now, he will spend the next few months figuring just how much the business, Morgan Stanley Smith Barney, is worth to his bank.

The two financial firms will be wrangling over the value of a 14 percent stake in the joint venture, which Morgan Stanley announced that it would buy on Thursday.

It is an emblematic deal for Morgan Stanley. The financial firm has highlighted the group, which encompasses nearly 17,200 financial advisers and $1.7 trillion of client assets, as a pillar of its turnaround effort to reshape its strategy and to temper risk in the wake of the financial crisis.

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Morgan Stanley Smith Barney, led by Gregory J. Fleming, is proving to be a bright spot for its parent. Last year, Morgan Stanley’s global wealth management group, which includes the joint venture, posted net revenue of $13.4 billion, up from $12.6 billion in 2010. In the first quarter of 2012, global wealth management recorded pretax profit of $387 million, up 12.5 percent from the period a year earlier.

Despite the strength, the two banking giants may have a tough time hashing out the purchase price. One Wall Street executive joked Thursday that Morgan Stanley will be the low bid, and Citigroup will be the high one.

The joint venture was forged in the middle of the financial crisis in January 2009, when the deal was valued at roughly $20 billion. Since then, Citigroup has listed the 49 percent stake on its books at roughly the original level.

But Citigroup does not mark the price of the brokerage up or down with the market — and the bank believes it’s potentially worth more than its balance sheet would indicate. The firm has said that the midpoint of its current range of estimates for the brokerage is higher than the value on its books, according to a recent filing.

In the next week, the banks are expected to hire outside advisers to help them come up with a fair market value for their stakes. The process will be more art than science, since each side may have its own interpretation of the business.

The two banks have up to 90 days to agree on a price. But if they do not agree, an arbitrator will decide the matter.

After these negotiations are completed, Morgan Stanley will hold 65 percent of the joint venture. It has the option to buy another 15 percent next year, and the rest of it in 2014.

But Morgan Stanley is already acting like the outright owner. The firm has now moved most of the former Smith Barney advisers onto the Morgan Stanley system. It is expected Morgan Stanley will also eventually drop the Smith Barney from the brokerage’s name.

Article source: http://dealbook.nytimes.com/2012/05/31/morgan-stanley-to-increase-stake-in-brokerage-venture-to-65/?partner=rss&emc=rss