) fourth quarter 2012 earnings from continuing operations came in
at 28 cents per share, marginally ahead of the Zacks Consensus
Estimate of 26 cents. Moreover, the results are significantly
better than the prior-year quarter's loss of 13 cents.
In 2012, Morgan Stanley reported a loss from continuing
operations of 3 cents per share, narrower than the Zacks
Consensus Estimate of a loss of 6 cents. However, in 2011, the
company had reported earnings of $1.26.
Better-than-expected quarterly results for Morgan Stanley were
attributable to top-line growth, partially offset by still high
operating expenses. Further, increase in net revenue across all
segments was the tailwind for the company.
Excluding the debt-related credit spreads and Debt Valuation
Adjustment (DVA), Morgan Stanley reported net income of $894
million or 45 cents per share from continuing operations. The
company had recorded a loss of $349 million or 20 cents per share
from continuing operations in the year-ago quarter.
Further, in the fourth quarter, Morgan Stanley ranked #1 in
global IPOs, while it ranked #2 in global announced M&A and
Behind the Headlines
Net revenues (excluding DVA adjustments) for the quarter were
$7.5 billion, surging 40% from the year-ago quarter. Net revenues
also significantly outpaced the Zacks Consensus Estimate of $7.3
billion. After taking into consideration the negative revenue
pertaining to changes in Morgan Stanley's debt-related credit
spreads and DVA, net revenues grew 22.7% year over year to $7.0
In 2012, net revenues (excluding DVA adjustments) were $30.5
billion, increasing 6.9% from the year-ago quarter. Net revenues
were also ahead of the Zacks Consensus Estimate of $29.9 billion.
However, after taking into consideration the negative revenue
pertaining to changes in Morgan Stanley's debt-related credit
spreads and DVA, net revenues declined 19.0% year over year to
Morgan Stanley recorded a net interest income of $175 million in
the reported quarter, down 35% year over year. The fall was
primarily a result of rise in interest income that was
more-than-offset by higher interest expenses.
Total non-interest revenues jumped 26% year over year to $6.8
billion. All the non-interest income components, other than
commissions and fees, rose from the prior-year quarter.
Total non-interest expenses were $6.1 billion, almost at par
with the previous-year quarter level. Morgan Stanley's
compensation to net revenue ratio for the reported quarter was
52%, compared with 67% in the year-ago quarter.
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(IS) reported pre-tax income from continuing operations of $57
million compared with pre-tax loss of $772 million in the
prior-year quarter. Net revenues were $3.0 billion, up 42.7% from
$2.1 billion in the year-ago quarter. However, excluding DVA, net
revenue stood at $3.5 billion, rising 86.9% on a year-over-year
Global Wealth Management
(GWM) pre-tax income from continuing operations was $581 million,
increasing significantly from $238 million in the year-ago
quarter. Net revenue was $3.5 billion, improving 7.5% from $3.2
billion in the year-ago quarter, reflecting marginally higher
asset management fees.
(AM) pre-tax income from continuing operations was $221 million,
up substantially from $78 million in the year-ago quarter. Net
revenue for the reported quarter was $599 million, up 41.3% from
$424 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 Dec 31, 2012, total assets under management were $338
billion, up 17.8% from $287 billion as of Dec 31, 2011. The surge
primarily reflected positive net customer flows in liquidity
funds and market appreciation.
As of Dec 31, 2012, book value per share was $30.65, down from
$31.42 as of Dec 31, 2011. Tangible book value per share was
$26.81, down from $27.95 as of Dec 31, 2011.
Morgan Stanley's Tier 1 capital ratio, under Basel I, was
approximately 17.9% 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 Feb 15 to shareholders of record on Feb 5.
Performance by Peers
Among other Wall Street giants -
JPMorgan Chase & Co.
The Goldman Sachs Group Inc.
) - reported robust fourth quarter results, while for
Bank of America Corporation
) the beat was by a penny.
) reported disappointing fourth quarter 2012 results with
earnings per share significantly below the Zacks Consensus
Estimate. The quarterly results were impacted by credit valuation
adjustment (CVA) and debt valuation adjustment (DVA) as well as
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. Moreover, additional
stake buy in the Morgan Stanley Smith Barney 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.
Earlier this month, Morgan Stanley announced its plan to retrench
nearly 1,700 workers as well as reduce and re-size IS segment's
geographic footprint. The market instability and weakening
revenue sources prompted the company to take this decision for
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 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. Also, we believe that
Morgan Stanley will be able to clear the upcoming round of stress
tests. Hence, there remains a chance of meaningful capital
deployment going forward.
Morgan Stanley currently retains a Zacks Rank #3 (Hold). Also, we
maintain a long-term Neutral recommendation on the stock.