Morgan Stanley, Goldman Say 4th-Qtr Earnings Decline
By Monique Wise and Tom Cahill
New York, Dec. 19 (Bloomberg) -- Morgan Stanley Dean Witter & Co. and Goldman Sachs Group Inc., the two biggest equity underwriters and merger advisers, said fourth-quarter net income fell as slumping stock and bond markets curbed investment banking and led to losses from venture capital.
Morgan Stanley, the largest U.S. securities firm by market value, had its first decline in nine quarters. For Goldman it was the first slide since going public in May 1999, as the two firms were the first to report earnings.
Investors said they'd anticipated the declines, driving the firms' shares down by a third from their September peak. They're betting now on a Federal Reserve interest rate cut that could revive markets. Goldman shares rallied, rising $3.44 to $89.38, while Morgan Stanley shares declined 25 cents to $69, losing an early gain after the Fed left rates unchanged today.
``What the market seems to be telling is that the worst is over,'' said James Ellman, who manages about $800 million at Merrill Lynch Investment Managers.
Net profit at Morgan Stanley fell 26 percent to $1.21 billion, or $1.06 a share, in the quarter ended Nov. 30, from a record $1.63 billion, or $1.42 a share, a year earlier, after accounting for a 2-for-1 stock split. Net revenue was $5.65 billion, little changed from last year.
Goldman Sachs, the third-largest U.S. securities firm by capital, said net income fell to $601 million, or $1.16 a diluted share, compared with $756 million, or $1.54 a share. Without a charge to account for the purchase of Spear Leeds & Kellogg LP, earnings were little changed at $781 million, or $1.50 per share, up from $756 million, or $1.54 per share.
`Half-Full'
``The market is looking at these numbers as the glass being half full. These companies had very high rates of profitability despite bad markets,'' said Ellman.
Excluding the one-time costs, Goldman's profits rose while Morgan Stanley's fell. Goldman also beat Wall Street's average estimate of $1.28 a share, while Morgan Stanley missed the forecast of $1.29.
Goldman also reported a 50 percent increase in trading, while Morgan Stanley posted a 13 percent drop. The two firms' trading results also diverged compared to the third quarter: Morgan Stanley dropped 40 percent, while Goldman fell just 23 percent.
Morgan Stanley's trading ``fell well short of our expectations,'' said Mark Constant, an analyst of Lehman Brothers Holdings Inc. It posted losses in high-yield bonds, led by those of telecommunications companies such as ICG Communications Inc., which filed for bankruptcy court protection a month ago. In October the firm said losses from high-yield bonds would total about $89.7 million, reducing earnings by about 4 cents a share in the third and fourth quarters.
``Morgan Stanley has had some pain,'' said Michael Santelli, who helps manage about $1.3 billion for National City Investment Management Co. in Cleveland, which held about 601,116 shares in Morgan Stanley in September, according to SEC filings. ``At some point, they're going to come back.''
What's more, Goldman chief financial officer David Viniar said that the business the firm has lined up for next year exceeds what they had 12 months ago.
``The backlog in investment banking, although off from record levels of the third quarter, is still above what it was a year ago,'' said Viniar. ``Equities trading continues to perform reasonably well. Fixed income and commodities had a much slower quarter.''
A.G. Edwards
Separately, A.G. Edwards Inc., one of the only remaining independent brokerage firms, said its fiscal third-quarter profit fell 50 percent. A.G. Edwards said it earned $57.2 million, or 69 cents a share, down from $115.3 million, or $1.25, in the year-ago period. The firm had revenue of $662 million, down from $715 million a year ago. Its shares slid 63 cents to $45.19.
Morgan Stanley's fourth-quarter net revenue from investment banking -- underwriting securities and advising on mergers -- fell 36 percent to $888 million. Revenue from trading and principal investments fell 13 percent to $985 million.
Morgan Stanley reported a loss of $103 million from investments, compared with a gain of $227 million in the year- earlier period. The firm said its private equity group had a loss of $73 million in the quarter, compared with a gain of $173 million a year ago, reflecting the lower securities prices ``primarily in the telecommunications and Internet sectors,'' the firm said in a release.
Overall, Goldman's net revenue was little changed at $3.4 billion, compared with $3.5 billion a year ago. The figure was down 25 percent from the third quarter.
`Less Robust'
`Obviously, we're operating in a less robust environment than we were operating in last year,'' said Viniar in a conference call with reporters.
The firm's fourth-quarter revenue from investment banking -- underwriting securities and advising on mergers -- fell 7 percent to $1.22 billion.
Revenue from trading and principal investments fell 18 percent to $1.03 billion. The decline came as investments in Goldman's merchant banking and venture capital unit dropped to a loss of $239 million from a gain of $407 million a year ago.
Goldman's revenue from bond and currency trading declined as investors retreated from the markets, said Viniar.
``We did not have mark-to-market losses or write downs of any positions,'' said Viniar. ``When you look at (fixed income) trading it really just a general slowdown in customer activity.''
The firm's revenue from asset management and securities services, such as securities lending, rose 28 percent to $1.2 billion. It had net inflows of $40 billion, helping offset market declines and bringing assets under management up 14 percent to $294 billion.
Rapid Rebound
Executives at the firms say a market rebound could prompt a rapid rebound.
Next year may not be as bleak as some anticipate, said Morgan Stanley's chief financial officer Robert Scott, citing cash on the sidelines and a ``decent'' merger calendar.
``We're not ready to hang crepe,'' said Scott.
The firms' records on holding the line on costs -- mainly employee compensation -- diverged. Goldman held down the costs while Morgan Stanley's jumped.
At Goldman, the ratio of compensation and benefits to net revenue for year 2000 was 47 percent, compared to 50 percent for the first nine months and less than last year's 48 percent.
Viniar said the growth in the workforce, which totaled about 22,600, would slow to about 10 percent, compared to the previous two years' 21 percent.
Morgan Stanley's Scott said the slowdown in business in the second half of the year -- after record business in the first half -- caused compensation costs to soar as rivals tried to lure talent away.
``You had some unbelievable practices going on in the marketplace,'' said Scott. ``We haven't seen anything like that for at least five or six years. It was a pretty unusual set of circumstances.''
For Morgan Stanley's securities unit, compensation costs rose 34 percent to $1.78 billion, or 31 percent of the unit's net revenue, up from 23 percent a year ago.
Without disclosing specific numbers, Scott said headcount rose about 14 percent overall from a year ago, although the growth for the securities group was closer to 26 percent, led by a 37 percent surge in Europe. While there isn't a hiring freeze at Morgan Stanley, ``headcount growth will be significantly slower in 2001,'' Scott said.
Best Regards, J.T. |
