) third quarter 2012 earnings from continuing operations came in
at 28 cents per share, marginally surpassing the Zacks Consensus
Estimate of 24 cents. This is also significantly ahead of the
prior-year quarter earnings of 2 cents.
Adjusting the debt-related credit spreads and Debt Valuation
Adjustment (DVA), Morgan Stanley reported net loss of $1.03
billion or 55 cents per share from continuing operations. The
company earned $2.13 billion or $1.14 per share from continuing
operations in the year-ago quarter.
Better-than-expected results for Morgan Stanley were attributable
to top-line growth (excluding DVA adjustments), partially offset
by slight rise in operating expenses. Further, increase in net
revenue across all segments was the tailwind for the company.
In September, Morgan Stanley completed the purchase of the
additional 14% stake in Morgan Stanley Smith Barney (MSSB) - its
brokerage joint venture (JV) with
) - for $1.89 billion. As of September 30, 2012, the company
holds a 65% stake in the JV.
Further, Morgan Stanley ranked #1 in global IPOs, while it ranked
#2 in global announced M&A.
Performance in Detail
Net revenue (excluding DVA adjustments) for the quarter was $7.6
billion, surging 18% from the year-ago quarter. Net revenue also
significantly outpaced the Zacks Consensus Estimate of $6.7
billion. Moreover, after taking into consideration the negative
revenue pertaining to changes in Morgan Stanley's debt-related
credit spreads and DVA, net revenue declined 46.1% year over year
to $5.3 billion.
Morgan Stanley recorded a net interest loss of $157 million
compared with net interest income of $145 million in the
prior-year quarter. The deterioration primarily resulted from
drastic fall in interest income, partially offset by a dip in
Total non-interest revenues plummeted 43.7% year over year to
$5.4 billion. All the non-interest income components, apart from
asset management, distribution and administration fees as well as
investment banking fees, declined from the prior-year quarter.
Total non-interest expenses were $6.8 billion, rising 10.5% from
$6.1 billion in the previous-year quarter. The increase was
attributable to higher total compensation and non-compensation
Morgan Stanley's compensation to net revenue ratio for the
reported quarter was 74%, compared with 37% in the year-ago
reported pre-tax loss from continuing operations of $1.9 billion
compared with pre-tax profit of $3.4 billion in the prior-year
quarter. Net revenue was $1.4 billion, down 79% from $6.4 billion
in the year-ago quarter. However, excluding DVA, net revenue
stood at $3.6 billion, up 21.3% on a year-over-year basis.
Global Wealth Management (GWM)
pre-tax income from continuing operations was $239 million, down
33% from $356 million in the year-ago quarter. Pre-tax income was
adjusted for certain non-recurring costs related to the MSSB
integration and the purchase of an additional stake in the JV.
Net revenue was $3.3 billion, improving 3% from $3.2 billion in
the year-ago quarter, reflecting marginally higher asset
Asset Management (AM)
pre-tax income from continuing operations was $198 million, up
from pre-tax loss of $118 million in the year-ago quarter. Net
revenue for the reported quarter was $631 million, up
significantly from $205 million in the year-ago quarter. The
substantial rise in net revenue was driven by robust results in
the Traditional Asset Management business along with gains on
principal investments in the Merchant Banking and Real Estate
As of September 30, 2012, total assets under management were $331
billion, up 23.5% from $268 billion as of September 30, 2011.
As of September 30, 2012, book value per share was $30.53, down
from $31.29 as of September 30, 2011. Also, tangible book value
per share was $26.65, down from $27.79 as of September 30, 2011.
Morgan Stanley's Tier 1 capital ratio, under Basel I, was
approximately 16.7% and Tier 1 common ratio was approximately
Concurrent with the earnings release, Morgan Stanley declared a
quarterly dividend of 5 cents per share. The dividend will be
paid on November 15 to shareholders of record on October 31.
Performance by Peers
Like Morgan Stanley, its close peers -
JPMorgan Chase & Co.
The Goldman Sachs Group Inc.
Bank of America Corporation
) and Citigroup - also reported substantially
better-than-expected third quarter results. For JPMorgan and
Goldman, results primarily benefited from improved revenue.
Moreover, for Citigroup and Bank of America, positive results
were mainly aided by reduction in loan loss provisions.
We expect Morgan Stanley's initiatives to offload its non-core
assets will help reduce balance sheet risk and shift focus on
less capital incentive AM and GWM segments. Also, a 14% stake buy
in the MSSB JV will diversify its revenue base and stabilize the
company's earnings forward.
Morgan Stanley's organic and inorganic growth initiatives
continue to be the significant growth drivers. The company
remains focused on diversifying its revenue base by expanding its
footprints in economies which are less impacted by the financial
crisis and the European debt crisis.
Nevertheless, there are concerns related to Morgan Stanley's
financials being marred by new regulatory requirements, elevated
expenses and intense pricing competition. Also, stringent capital
norms may somewhat lower the flexibility of the company with
respect to its investments and lending volumes.
An investor with an appetite to absorb risks related to the
market volatility should not be disappointed with investments in
Morgan Stanley over the long term. The company's fundamentals
remain highly promising with a diverse business model and a
stable balance sheet and capital position. Nevertheless, we
remain concerned about the company's ability to enhance
shareholder value in the near term as it did not plea for any
additional capital deployment plans.
Morgan Stanley currently retains a Zacks #3 Rank, which
translates into a short-term Hold rating. Also, we maintain a
long-term Neutral recommendation on the stock.
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