Morgan Stanley Says Profit Fell 3%, Aims to Quell Market `Fear'
By Christine Harper
Sept. 17 (Bloomberg) -- Morgan Stanley, seeking to reassure investors after its stock dropped 23 percent this week, rushed out a third-quarter earning report late yesterday saying profit fell a less-than-estimated 3 percent.
The report, originally scheduled to be released this morning in New York, showed that revenue from stock trading and an asset sale cushioned a drop in the firm's investment-banking and fixed-income businesses. Earnings fell to $1.43 billion, or $1.32 per share, in the three months to Aug. 31, the company said. The average estimate of 18 analysts surveyed by Bloomberg was 78 cents a share.
Morgan Stanley Chief Executive Officer John Mack, 63, is trying to navigate declining investor confidence that prompted emergency sales of Merrill Lynch & Co. and Bear Stearns Cos. and the bankruptcy of 158-year-old Lehman Brothers Holdings Inc. The turmoil spurred the U.S. government late yesterday to lend as much as $85 billion to American International Group Inc. to prevent the insurer's collapse. Colm Kelleher, Morgan Stanley's finance chief, said markets were reacting to ``rumor and fear.'
``They had a reasonably good quarter considering how absolutely terrible the environment is, but it's by no means a home run,' said Ryan Caldwell, a fund manager at Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $70 billion including Morgan Stanley shares. ``The issue is going to continue to be the confidence people have in their ability to fund themselves.'
Morgan Stanley fell $3.49, or 11 percent, to $28.70 in New York Stock Exchange composite trading yesterday. The shares have dropped 46 percent this year, the second-worst performance among the 10 companies in the XBD Amex Securities Broker/Dealer Index, after Merrill.
Borrowing Costs
Lehman's bankruptcy filing and Merrill's abrupt sale to Bank of America Corp. whipsawed financial stocks this week. AIG, the biggest U.S. insurer by assets, plummeted 79 percent in New York trading during the past three days after failing to raise money to avert a credit downgrade. The Standard & Poor's 500 Index swung between gains and losses at least two dozen times yesterday.
Morgan Stanley's risk of losses from Lehman and AIG were ``not material,' Kelleher, 51, said on a conference call with analysts yesterday.
The firm's cost of borrowing has surged, with record prices to insure its debt in the credit-default swap markets. Kelleher said the increase was likely to be temporary and the company has enough money on hand that it can wait until 2009 to raise more in the markets.
``I don't believe these unsecured funding levels are sustainable,' Kelleher said. ``We will get to a much more sensible funding level.'
Accounting Gain
The credit-contraction has led some analysts to say investment banks, which rely on stock and bond markets, need to combine with commercial banks to gain stable financing from deposits. Kelleher said Morgan Stanley, the second-biggest U.S. securities firm, is ``very convinced and confident in the broker-dealer model' and doesn't see a need to do a bank deal.
Investors' declining appetite for Morgan Stanley debt wound up boosting third-quarter earnings. The firm booked $1.4 billion of revenue because a drop in the value of the firm's liabilities allowed it to book an accounting gain.
Morgan Stanley's results also included a $745 million pretax gain from the sale of part of the firm's stake in MSCI Inc., an index company.
Investment-banking net revenue sank to $1.29 billion, 40 percent lower than in the same period last year, as the pace of mergers and acquisitions slowed, the company said. Net revenue in the firm's fixed-income group declined 67 percent to $1.6 billion.
Goldman Performance
Goldman Sachs Group Inc., the largest U.S. securities firm, said yesterday that profit fell 70 percent in the third quarter from a year earlier, the steepest decline since the company went public in 1999. David Viniar, Goldman's chief financial officer, said the firm's success in skirting losses through the crisis shows that investors should focus on performance, not the business model.
Morgan Stanley's third-quarter profit from continuing operations rose 3 percent from $1.47 billion, or $1.38, a year ago, the company said. Net revenue rose 1 percent to $8 billion from a year earlier and the return on equity, a measure of how well the firm reinvests earnings, was 16.5 percent in the quarter, compared with 17.2 percent in the prior year.
Net income, including the Discover Financial Services unit spun off last year, fell 7.6 percent to $1.43 billion, or $1.32 per share, from $1.54 billion, or $1.44 per share.
``The earnings were not as bad as people were fearing based on everything that has transpired,' said Jon Fisher, who oversees $1.5 billion including Morgan Stanley shares at Minneapolis-based Fifth Third Asset Management. ``They were not quite as leveraged as Lehman and Bear Stearns, and they have been more proactive on the hedging front, taking risks off the balance sheet.'
To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.
Last Updated: September 17, 2008 00:01 EDT |
