Wednesday, April 22, 2009

Morgan Stanley suffers another loss

Morgan Stanley reported a much bigger-than-anticipated loss in the first quarter Wednesday, as the revenue at the bank's bread-and-butter equity sales and trading business plunged 74% from a year ago.

The firm was also hit by its exposure to the tanking commercial real estate market. Morgan Stanley (MS, Fortune 500) shares tumbled 6% in early morning trading on the news.

The Wall Street investment bank said it lost $177 million, or 57 cents per share, in the quarter ended March 31. Analysts were expecting a loss of 8 cents a share, according to Thomson Reuters.

Including the payment of $401 million in preferred dividends tied to the government investing in Morgan Stanley last year as part of the bank bailout, the company reported a net loss to common shareholders of $578 million.

The company also slashed its quarterly dividend by 81%, to 5 cents from 27 cents, in a bid to conserve $1 billion in cash annually.

The latest results extend the firm's losing streak, and stand out from the rest of the major banks' earnings, which have been generally better than expected -- if sometimes of questionable quality. Last quarter, Morgan Stanley posted a $2.3 billion loss.

In a statement, CEO John Mack focused on strong performances in Morgan Stanley's fixed-income trading and investment banking businesses.

He said the bank was the top performer in the merger-and-acquisition rankings during the quarter, and like its peers Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), made significant sums trading plain vanilla fixed income products in the interest rate, commodity and credit arenas.

But those gains were offset by $1 billion in losses on real estate investments, and $1.5 billion of lost revenue tied to changes in the value of the bank's liabilities.

Meanwhile, Morgan Stanley said revenue in its equity sales and trading group plunged to just $900 million from $3.4 billion a year earlier.

Those setbacks help to explain part of the huge decline in Morgan Stanley's first-quarter revenue, which plunged 62% from a year ago to $3 billion.

The commercial real estate loss is particularly notable, for analysts have been warning that big banks could take a big hit this year in that once-hot market.

Goldman Sachs analysts wrote earlier this year that they expect commercial real estate to be the biggest problem asset class for banks in 2009. Analyst James Fotheringham forecast a 21%-26% price decline, which he said would lead to tens of billions of dollars of loan losses for banks and brokerage houses.

The results and the dividend cut reflect a decline in the profitability of Morgan's core business. Though Morgan Stanley's capital ratios remain strong - the bank said its Tier 1 capital, a measure favored by regulators, is 16% - it seems clear Morgan Stanley won't be joining the rush to repay the funds it got last fall under the Treasury's Troubled Asset Relief Program.

Mack told Morgan Stanley employees in a conference call last month that he didn't think now is the time for the bank to give back the $10 billion it got in October under TARP. Rivals such as Goldman and JPMorgan have indicated they hope to repay the funds soon.

Morgan Stanley said its Tier 1 capital ratio, excluding the TARP funds, is 13%. That's double the 6% ratio that allows regulators to deem a firm well capitalized.

Mack also said the latest-quarter loss was partly attributable to something that would normally count as good news.

He said Morgan Stanley would actually have reported a first-quarter profit if not for "the dramatic improvement in our credit spreads -- which is a significant positive development."

Tighter credit spreads reflect reduced investor anxiety over the prospect that the company might default on its obligations, and result in lower borrowing costs for the company.

But they also obligate the company to write up the value of those liabilities, in light of the increased amount Morgan Stanley would have to pay to repurchase those debts.

In last year's first quarter, Morgan Stanley posted $1 billion in gains by writing down the value of its obligations as credit spreads widened.

The disappointing first-quarter report comes as investors puzzle over what course Mack will chart in the coming year. Like Goldman, Morgan Stanley became a Federal Reserve-regulated bank holding company last year to ease worries about its access to funding.

But unlike Goldman, which has said it intends to stay focused on its investment business, Mack has said Morgan Stanley might seek to buy a regional bank to expand its deposit base.

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