) first-quarter 2013 adjusted earnings from continuing operations
of 61 cents per share outpaced the Zacks Consensus Estimate by a
nickel. However, this compared unfavorably with prior-year
quarter earnings of 71 cents.
Better-than-expected results for Morgan Stanley were driven by a
decline in operating expenses, partially offset by a fall in top
line. Also, increase in net revenue across all segments was the
tailwind. Further, improved asset position and stable capital
ratios were the other highlights of the quarter.
Including the debt-related credit spreads and Debt Valuation
Adjustment (DVA), Morgan Stanley reported net income of $1.0
billion or 49 cents per share. The company had recorded a loss of
$79 million or 6 cents per share in the year-ago quarter.
Further, in the first quarter, Morgan Stanley ranked #2 in global
announced M&A and #3 in global equity.
Behind the Headlines
Net revenue (excluding DVA adjustments) for the quarter was $8.5
billion, down 4.9% from the year-ago quarter. However, net
revenue outpaced the Zacks Consensus Estimate of $8.3 billion.
After taking into consideration the negative revenues pertaining
to changes in Morgan Stanley's debt-related credit spreads and
DVA, net revenue grew 17.8% year over year to $8.2 billion.
Morgan Stanley recorded net interest income of $185 million in
the reported quarter compared with a negative net interest income
of $59 million in the year-ago quarter. The year-over-year
improvement primarily stemmed from a decline in interest
Total non-interest revenues jumped 14.1% year over year to $8.0
billion. All the non-interest income components except
commissions and fees grew from the prior-year quarter.
Total non-interest expenses were $6.5 billion, down 2.6% from the
previous-year quarter. Morgan Stanley's compensation to net
revenue ratio for the reported quarter was 52% compared with 64%
in the year-ago quarter.
Institutional Securities (IS)
reported pre-tax income from continuing operations of $830
million compared with pre-tax loss of $329 million in the
prior-year quarter. Net revenue was $4.1 billion, up 30.4% from
$3.1 billion in the year-ago quarter. However, excluding DVA, net
revenue stood at $4.4 billion, falling 13.9% on a year-over-year
Global Wealth Management (GWM)
pre-tax income from continuing operations was $597 million,
increasing 48.1% from $403 million in the year-ago quarter. Net
revenue was $3.5 billion, improving 5.4% from $3.2 billion in the
year-ago quarter, reflecting higher asset management fees.
Asset Management (AM)
pre-tax income from continuing operations was $187 million, up
46.1% year over year. Net revenue for the reported quarter was
$645 million, up 21.0% from $533 million in the year-ago quarter.
The rise was driven by robust results in the Traditional Asset
Management business along with gains on principal investments in
the Merchant Banking and Real Estate Investing businesses.
As of Mar 31, 2013, total assets under management were $341
billion, up 12.2% from $304 billion as of Mar 31, 2012. The surge
primarily reflected positive net customer flows and market
As of Mar 31, 2013, book value per share was $31.22, up from
$30.74 as of Mar 31, 2012. Tangible book value per share was
$27.39, up from $27.37 as of Mar 31, 2012.
Morgan Stanley's Tier 1 capital ratio, under Basel I, was 13.9%
and Tier 1 common ratio was 11.5% compared with 16.9% and 13.3%,
respectively in the year-ago quarter.
Concurrent with the earnings release, Morgan Stanley declared a
quarterly dividend of 5 cents per share. The dividend will be
paid on May 15 to shareholders of record as of Apr 30.
Performance of Other Major Banks
JPMorgan Chase & Co.
The Goldman Sachs Group Inc.
) have reported better-than-expected first quarter results and
upheld the banking image. While the results for JPMorgan were
primarily aided by solid expense management, Goldman's results
largely benefited from an improved top line.
Bank of America Corporation
) marginally lagged the Zacks Consensus Estimate. Though results
benefited from a rise in revenues, substantial slowdown in the
provision for credit losses and a drop in operating expenses,
lower mortgage banking income and reduced net gains on the sales
of debt securities somewhat faded the shine of its bottom line.
We expect Morgan Stanley's initiatives to offload its non-core
assets to reduce balance sheet risk and shift focus on the less
capital incentive AM and GWM segments. Moreover, additional stake
buy in Morgan Stanley Wealth Management (MSWM) JV will diversify
its revenue base and stabilize the company's earnings going
In Mar 2013, Morgan Stanley received approval from the Federal
Reserve to go ahead with its plan to acquire the remaining 35%
stake in MSWM. Further, the approval of its latest capital plan
reinforces the belief that the company's capital position remains
stable. Moreover, there are high chances of enhanced dividend
payments and resumption of share buyback activity once the stake
buyout is complete, provided it receives the Fed's consent for
Moreover, 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 footprint in economies, which are less impacted by
the financial crisis and the European debt crisis.
Yet, there are concerns related to Morgan Stanley's financials
being marred by new regulatory requirements and intense pricing
competition. Also, stringent capital norms may somewhat lower the
flexibility of the company with respect to its investments and
An investor with an appetite to absorb risks related to 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.
Morgan Stanley currently retains a Zacks Rank #3 (Hold).
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