Morgan Stanley Tops on A/C Charges - Analyst Blog


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Morgan Stanley 's ( MS ) first-quarter 2012 adjusted earnings came in at 71 cents per share, significantly topping the Zacks Consensus Estimate of 46 cents. This also compares favorably with the prior-year quarter adjusted earnings of 59 cents.

Considering debt-related credit spreads and Debt Valuation Adjustment ( DVA ), Morgan Stanley reported a net loss of $78 million or 5 cents per share from the continuing operations. The company had earned $984 million or 51 cents per share from continuing operations in the year-ago quarter.

Better-than-expected results for Morgan Stanley resulted from higher top line (excluding DVA adjustments), partially offset by slight increase in non-interest expenses. Moreover, a fall in net revenues across all segments except Global Wealth Management marginally marred the company's results. Additionally, the company's capital ratios remained stable.

Considering discontinued operations, for the reported quarter Morgan Stanley's net loss came in at $119 million or 6 cents per share compared with net income of $736 million or 50 cents per share in the prior-year quarter.

Further, Morgan Stanley ranked #1 in global IPOs while ranked #2 in global announced and completed M&A.

Quarter in Detail

Net revenue (excluding DVA) for the quarter was $8.91 billion compared with $7.76 billion in the year-ago quarter. Net revenue also surpassed the Zacks Consensus Estimate of $8.14 billion. However, after taking into account, the negative revenue of $2.0 billion pertaining to changes in the company's debt-related credit spreads and DVA, net revenue declined nearly 8% year over year to $6.94 billion.

Morgan Stanley recorded a net interest loss of $59 million compared with a net interest income of $6 million in the prior-year quarter. The deterioration was primarily a result of substantially higher interest expense.

Total non-interest revenues fell 8% year over year to $7.0 billion. All the non-interest income components except other income declined from the prior-year quarter.

Total non-interest expenses inched up 1% year over year to $6.73 billion. The main reason for the rise was higher total compensation expenses (up 3% year over year), partially mitigated by a decline in total non-compensation expenses (down 4% year over year).

Morgan Stanley's compensation to net revenue ratio for the reported quarter was 64%, compared with 57% in the year-ago quarter.

Segment Performance

Institutional Securities reported pre-tax loss from continuing operations of $312 million compared with pre-tax income of $432 million in the prior-year quarter. Net revenue was $3.0 billion, down 15% from $3.6 billion in the year-ago quarter. One of main reasons for the decline in net revenue is the drop in advisory and equity underwriting revenues as a result of lower levels of market activity.

Global Wealth Management pre-tax income from continuing operations was $387 million, up 12.5% from $344 million in the year-ago quarter. Net revenue was $3.41 billion, up marginally from $3.4 billion in the year-ago quarter, reflecting higher asset management and net interest revenues that were mostly offset by lower commissions.

Asset Management pre-tax income from continuing operations was $128 million, up slightly 2.4% from $125 million in the year-ago quarter. Net revenue for the reported quarter was $533 million, down nearly 14% from $622 million in the year-ago quarter. The fall reflects lower gains on principal investments in the Merchant Banking business.

As of March 31, 2012, total assets under management were $304 billion, up nearly 10% from $276 billion as of March 31, 2011.

Capital Ratios

As of March 31, 2012, book value per share was $30.74, down from $31.45 as of March 31, 2011. However, tangible book value per share was $27.37, up from $26.97 as ofMarch 31, 2011.

Morgan Stanley's Tier 1 capital ratio, under Basel I, was approximately 16.8% and Tier 1 common ratio was approximately 13.2%.

Dividend Update

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 on April 30.

Performance of Peers

Among Morgan Stanley's close peers,both JPMorgan Chase & Co. ( JPM ) and The Goldman Sachs Group Inc. ( GS ) reported better-than-expected results. Marked recovery of the bond and equity market coupled with consequent revenue growth helped JPMorgan outpace the Zacks Consensus Estimate. Moreover, the results primarily benefited from improved revenue and slowdown in provision for credit losses, which more-than-offset higher non-interest expense.

Similarly, Goldman Sachs' earnings also significantly surpassed the Zacks Consensus Estimate. Amid the improving economy and global markets, the results were driven by increases in investment banking revenues and equity trading. Further, higher client activity levels added fuel to the fire. Higher operating expenses were also on the downside.

However, the results of Citigroup Inc. ( C ) were mixed. It was impacted by accounting charges though modestly gaining from its recent stake sale activities and increasing global consumer banking as well as the revenues from transaction services.

Our Viewpoint 

We expect Morgan Stanley's initiatives to offload its non-core assets will help lowering balance sheet risk. Moreover, its organic and inorganic growth initiatives continue to be the significant growth drivers. Nevertheless, there are concerns related to the company's financials being marred by new regulatory requirements, elevated expenses and intense pricing competition.

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 most difficult stress test, it is for sure 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 had not asked for any dividend rise or share repurchases authorization in its capital plan.

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.

CITIGROUP INC ( C ): Free Stock Analysis Report
GOLDMAN SACHS ( GS ): Free Stock Analysis Report
JPMORGAN CHASE ( JPM ): Free Stock Analysis Report
MORGAN STANLEY ( MS ): 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
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