Morgan Stanley Beats Estimates on Brokerage-Revenue Gains

By Michael J. Moore

Morgan Stanley reported profit that beat analysts’ estimates as pretax earnings from its retail brokerage, the world’s largest, rose to a record.

First-quarter net income was $984 million, or 49 cents a share, compared with a loss of $94 million, or 6 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting charges tied to the firm’s own debt, profit was 61 cents a share, topping the 56-cent average estimate of 20 analysts surveyed by Bloomberg. A 48 percent jump in pretax profit from the brokerage supported Chief Executive Officer James Gorman’s goal of doubling the firm’s return on equity by relying in part on better margins from that business. Morgan Stanley received approval last month from the Federal Reserve to buy the rest of the brokerage from Citigroup Inc. this year.

“Strong equity markets definitely help wealth management, and we’ve been in a period where equity and financial markets have been strong,” Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis, said before the results were released. “That’s going to translate into some strength in Morgan Stanley’s wealth-management division.”

While the brokerage gained, fixed-income revenue dropped from a year earlier for the third time in four quarters.

Morgan Stanley fell to $21.25 at 7:44 a.m. from $21.47 in New York trading yesterday. The shares are up 12 percent this year through yesterday, after climbing 26 percent in 2012. The stock is still 27 percent below its price when Gorman, 54, took over at the end of 2009.

Book Value

Revenue excluding accounting adjustments fell to $8.48 billion from $8.9 billion a year earlier. Book value per share rose to $31.22 from $30.70 at the end of December. The firm’s return on equity, a measure of how well it reinvests earnings, was 6 percent.

The accounting charge is known as a debt valuation adjustment, or DVA. It stems from increases in the value of the company’s debt, under the theory it would be more expensive to buy it back. The firm had a $317 million loss from DVA, versus a $1.98 billion charge in the first quarter of 2012.

Pretax profit from global wealth management, overseen by Greg Fleming, 50, jumped to $597 million as revenue climbed to $3.47 billion. The division’s pretax profit margin rose to 17 percent from 12 percent in the first quarter of 2012.

Profit Goal

Fleming has previously vowed to raise its pretax margin to the “mid-teens” by the middle of this year, and has said that the increase can be obtained through cost cutting as integration expenses decline. The figure was 17 percent in the fourth quarter, which Gorman cautioned was seasonally higher than the first quarter.

Gorman already has set a price with Citigroup to purchase the rest of the joint venture, which was created in 2009. Morgan Stanley said in January it will pay $4.7 billion for the last piece, which will place demands on an additional $400 million of capital.

Fleming pledged $500 million for upgrades and hired a new technology head for the division after financial advisers complained about glitches and more cumbersome processes following the integration of Morgan Stanley’s system with that of Smith Barney last year.

Asset management reported a pretax gain of $187 million, compared with $128 million in the previous year’s period.

Fixed Income

First-quarter revenue from fixed-income sales and trading, run by Ken deRegt with commodity trading co-heads Colin Bryce and Simon Greenshields, was $1.52 billion, excluding DVA. That missed estimates of $2.05 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.8 billion from Credit Suisse Group AG’s Howard Chen.

Fixed-income revenue fell 42 percent from $2.59 billion in the year-earlier quarter. That compared with a 9 percent decline at Goldman Sachs Group Inc. and a 3 percent decline at Citigroup.

In equities trading, headed by Ted Pick, Morgan Stanley’s revenue fell 19 percent from a year earlier to $1.59 billion, excluding DVA. That compared with $1.15 billion at Bank of America Corp. (BAC) and $1.72 billion at Goldman Sachs, excluding revenue from Goldman’s reinsurance business.

Citigroup said earlier this week that fixed-income trading fell 3 percent from a year earlier, topping analysts’ estimates.

Equity Estimates

Brad Hintz, an analyst at Sanford C. Bernstein & Co., had estimated equities revenue of about $1.4 billion, while Chen at Credit Suisse estimated $1.7 billion.

Investment banking, led by Mark Eichorn and Franck Petitgas, generated $945 million in first-quarter revenue. That figure, up 11 percent from a year earlier, included $251 million from financial advisory, $283 million from equity underwriting and $411 million from debt underwriting.

Morgan Stanley (MS) was the second-ranked underwriter of global equity, equity-linked and rights offerings in the first quarter, according to data compiled by Bloomberg. It was also the No. 4 adviser on global announced mergers and acquisitions and the seventh-ranked underwriter of U.S. bonds, the data show. The firm in February named Dan Simkowitz to co-lead the capital markets unit with Raj Dhanda.

Investors are looking for signs that Gorman is making strides toward his goal of cutting $1.6 billion of expenses during the next two years. Morgan Stanley cut 1,700 jobs in January, and has said it will pull back from countries including Russia and focus more operations in regional centers such as London and Hong Kong.

Bank of America reported first-quarter profit yesterday that missed analysts’ estimates on lower mortgage banking income and fixed-income trading revenue. Goldman Sachs posted earnings on April 16 that beat estimates on record debt underwriting revenue.

To contact the reporter on this story: Michael J. Moore in New York atmmoore55@bloomberg.net

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