) second quarter 2012 adjusted earnings came in at 16 cents per
share, significantly below the Zacks Consensus Estimate of 44
cents. However, this compares favorably with the prior-year quarter
adjusted loss of 46 cents.
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Lower-than-expected results for Morgan Stanley was primarily due
lower top line, partially offset by decline in operating expenses.
Further, a fall in net revenues across all segments marred the
After considering the gain from debt-related credit spreads and
Debt Valuation Adjustment (DVA), Morgan Stanley reported a net
income of $563 million compared with $1.22 billion in the year-ago
Additionally, earnings per share on a GAAP basis stood at 28 cents
compared to a loss of 36 cents in the prior-year quarter. The loss
in the second quarter of 2011 was attributable to a negative
adjustment of nearly $1.02, which was related to the conversion of
the Morgan Stanley's Series B Preferred Stock held by
Mitsubishi UFJ Financial Group Inc.
) into common stock.
Further, Morgan Stanley ranked #1 in global IPOs, while it ranked
#2 in global announced and completed M&A.
Behind the Headlines
Net revenue (excluding DVA) for the quarter was $6.6 billion, down
26.3% from the year-ago quarter. Net revenue also missed the Zacks
Consensus Estimate of $7.7 billion. Moreover, after taking into
account the positive revenue pertaining to changes in Morgan
Stanley's debt-related credit spreads and DVA, net revenue declined
24.5% year over year to $7.0 billion.
Morgan Stanley recorded a net interest loss of $161 million
compared with $68 million in the prior-year quarter. The
deterioration primarily resulted from lower interest income,
partially mitigated by a fall in interest expenses.
Total non-interest revenues fell 23.3% year over year to $7.1
billion. All the non-interest income components except asset
management, distribution and administration fees declined from the
Total non-interest expenses decreased 16.9% year over year to $6.0
billion. The dip was attributable to lower total compensation and
Morgan Stanley's compensation to net revenue ratio for the reported
quarter was 52%, compared with 50% in the year-ago quarter.
reported pre-tax income from continuing operations of $508 million
compared with $1.5 billion in the prior-year quarter. Net revenue
was $3.2 billion, down 37.3% from $5.2 billion in the year-ago
Global Wealth Management (GWM)
pre-tax income from continuing operations was $393 million, up
24.0% from $317 million in the year-ago quarter. Net revenue was
$3.3 billion, down 3.9% from $3.4 billion in the year-ago quarter,
reflecting lower transactional revenues, partly offset by higher
asset management fees.
Asset Management (AM)
pre-tax income from continuing operations was $43 million, down
significantly by 66.4% from $128 million in the year-ago quarter.
Net revenue for the reported quarter was $456 million, down 28.3%
from $636 million in the year-ago quarter.
As of June 30, 2012, total assets under management were $311
billion, up 5.1% from $296 billion as of June 30, 2011.
As of June 30, 2012, book value per share was $31.02, up from
$30.17 as of June 30, 2011. Also, tangible book value per share was
$27.70, up from $26.61 as of June 30, 2011.
Morgan Stanley's Tier 1 capital ratio, under Basel I, was
approximately 17.1% 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 August 15 to shareholders of record on July 31.
Performance by Peers
Among Morgan Stanley's close peers -
JPMorgan Chase & Co.
The Goldman Sachs Group Inc.
) - all reported substantially better-than-expected second quarter
Proving pessimists wrong, JPMorgan's earnings were a way ahead of
the Zacks Consensus Estimate. Despite the huge trading loss, a
marked recovery of the bond and equity market and the consequent
strong performances by its business segments helped the company
overcome its difficulties to a great extent.
Similarly, Goldman's earnings also significantly surpassed the
Zacks Consensus Estimate. Amid the deteriorating global markets and
European debt crisis, the results were driven by the company's
prudent expense management. Yet, lower client activity levels acted
as a headwind for the quarter. Likewise, the results of Citigroup
were somewhat encouraging, reflecting lower loan loss provisions,
higher transaction services revenues and a drop in expenses.
Additionally, another peer,
Bank of America Corporation
) marginally outpaced the Zacks Consensus Estimate. Results were
aided by improved non-interest income, substantial slowdown in
provision for credit losses, reduced non-interest expense primarily
due to the absence of the goodwill impairment charge and improved
credit quality across most major portfolios. However, lower net
interest income due to a weak interest rate environment was an
We expect Morgan Stanley's initiatives to offload its non-core
assets will help lower balance sheet risk and focus on less capital
incentive AM and GWM segments. Moreover, its 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 not heavily
impacted by the financial crisis and the current European debt
Nevertheless, there are concerns related to the company's
financials being marred by new regulatory requirements, elevated
expenses and intense pricing competition. Further, stringent
capital norms may somewhat lower the flexibility of Morgan Stanley
with respect to its investments and lending volumes.
Further, 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, from the risk perspective, as Morgan Stanley cleared the
toughest stress test in March, it is certain that the company would
be able to withstand another financial crisis. However, 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
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.