Morgan Stanley Tops Ests, Rev Falls - Analyst Blog

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Morgan Stanley 's ( MS ) fourth-quarter 2011 loss from continuing operations came in at 14 cents per share. This includes 59 cents loss related to MBIA Inc. ( MBI ) settlement charges.

Excluding these charges, Morgan Stanley reported a profit of 45 cents per share, way ahead of the Zacks Consensus Estimate loss of 58 cents. The company had earned 44 cents from continuing operations in the year-ago quarter.

For the full year 2011, Morgan Stanley recorded income from continuing operations of $1.26 per share compared with $2.45 reported in the prior year. However, this is significantly better than the Zacks Consensus Estimate of 72 cents.

A substantial benefit from the widening of debt-related credit spreads and Debt Valuation Adjustment ( DVA ) primarily made it possible for the company to report such impressive yearly results. The earnings per share calculation accounted for positive revenue of $3.7 billion or $1.34 per share related to these nonrecurring items. Without this positive impact, Morgan Stanley would have reported a loss of 8 cents per share from its continuing operations.

Moreover during 2011, Morgan Stanley completed several strategic initiatives that impacted the company's yearly earnings. These included the conversion of the company's Series B Preferred Stock held by Mitsubishi UFJ Financial Group Inc. ( MTU ) into common stock, the above mentioned MBIA settlement and the restructuring of the sale of Revel Entertainment Group, LLC.

Considering discontinued operations, for the quarter Morgan Stanley reported a net loss of $275 million or 15 cents per share compared with net income of $600 million or 41 cents per share in the prior-year quarter. For the full year, the company reported net income of $2.1 billion or $1.23 per share compared with $3.6 billion or $2.63 per share in the prior-year.

Morgan Stanley's core results benefited from completion/closure of various strategic actions, higher net interest income and decline non-interest expenses. However, substantial fall in net revenues across all the segments marred the company's results.

With robust M&A activity, Morgan Stanley maintained rank #1 in global completed M&A and rank #2 in global announced M&A during 2011. The company also ranked #2 in global IPOs and global Equity.

Quarter in Detail

Net revenue for the quarter fell 42% sequentially and 26% year over year to $5.71 billion. However, net revenue is in line with the Zacks Consensus Estimate. The total top-line figure included positive revenue of $216 million pertaining to changes in the company's debt-related credit spreads and DVA, compared with negative revenue of $945 million a year ago quarter.

For the fiscal 2011, net revenue was $32.4 billion, up 3% from $31.4 billion in the prior year. However, the full year net revenue came below than the Zacks Consensus Estimate of $32.6 billion.

Morgan Stanley recorded a net interest income of $270 million, compared with $140 million in the prior quarter and $259 million in the prior-year quarter. The sequential improvement was primarily a result of lower interest expense.

Total non-interest revenues declined 44% sequentially and 27% year over year to $5.4 billion. Substantially lower trading revenue, commissionsand fees and asset management, distribution and administration fees were the primarily dampeners.

Total non-interest expenses remained flat sequentially but decreased 6% year over year to $6.2 billion. Total compensation expenses increased 4% sequentially but declined 6% year over year at $3.81 billion, while total non-compensation expenses decreased 6% sequentially and 7% year over year to $2.4 billion.

Morgan Stanley's compensation to net revenue ratio for the reported quarter was 67% compared with 37% in the prior quarter and 52% in the year-ago quarter. The ratio was adversely affected by MBIA settlement charges.

Segment Results

Institutional Securities reported pre-tax loss from continuing operations of $779 million compared with pre-tax income of $448 million in the prior-year quarter. Net revenue in this segment was $2.1 billion, down 42% from $3.6 billion in the year-ago quarter.

Global Wealth Management pre-tax income from continuing operations was $244 million, down 37% from $390 million in the year-ago quarter. Net revenue was $3.3 billion, down 3% from $3.4 billion in the year-ago quarter. The decrease was attributable to lower commissions and investment banking revenues, partly mitigated by higher net interest revenues.

Asset Management pre-tax income from continuing operations was $78 million, down 77% from $353 million in the year-ago quarter. Net revenue for the reported quarter was $424 million, down 50% from $846 million in the year-ago quarter.  

As of December 31, 2011, total assets under management were $287 billion, up from $272 billion as of December 31, 2010.

Capital Ratios

At December 31, 2011, book value per share was $31.42, up from $31.29 at September 30, 2011. Tangible book value per share was $27.95, up from $27.79 at September 30, 2011.

Morgan Stanley's Tier 1 capital ratio, under Basel I, was approximately 15.6% and Tier 1 common ratio was approximately 13.0%.

Dividend Update

Concurrent with the earnings release, Morgan Stanley declared a quarterly dividend of 5 cents per share. The dividend will be paid on February 15 to shareholders of record on January 31.

Position of Peers

Among Morgan Stanley's close peers, both JPMorgan Chase & Co. ( JPM ) and Citigroup Inc. ( C ) reported disappointing results. Both buckled under the weakness in the wider economy and fundamental stress on the banking sector in particular. The top-line headwind continued for both, which was partially offset by improvement in credit quality and drop in provisions for credit losses.

However, the results of The Goldman Sachs Group Inc. ( GS ) were better-than-expected. Goldman reported a significant fourth-quarter profit, driven by increase in investment banking revenues. However, higher operating expenses were on the downside.

Our Viewpoint 

We expect the company's restructuring initiatives to reduce balance sheet risk. Moreover, its organic and inorganic growth initiatives continue to be significant growth drivers.

Nevertheless, there are concerns related to the company's financials being marred by new regulatory requirements, the fundamental pressures on the banking sector and intense pricing competition. We are also concerned aboutits inability to enhance shareholder value in the near term.

Morgan Stanley currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating.

CITIGROUP INC ( C ): Free Stock Analysis Report
GOLDMAN SACHS ( GS ): Free Stock Analysis Report
JPMORGAN CHASE ( JPM ): Free Stock Analysis Report
MBIA INC ( MBI ): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
MITSUBISHI-UFJ (MTU): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: C , DVA , GS , JPM , MBI

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