Wednesday 28 September 2016

Morgan Stanley's profit falls by more than half as trading slumps

Published 18/04/2016 | 15:25

Morgan Stanley headquarters in New York
Morgan Stanley headquarters in New York

Morgan Stanley's quarterly profit fell by more than half as the Wall Street bank's fixed-income trading and investment banking businesses took a hit from market volatility.

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But the earnings handily beat expectations as the bank slashed compensation costs by nearly a fifth. Chief Financial Officer Jonathan Pruzan told Reuters that more cuts would take effect towards the end of the year and early next year.

Sliding commodity and oil prices, worries about the Chinese economy and uncertainty about U.S. interest rates made for wobbly markets in January and February, scaring off traders, investors and companies hoping to list on stock exchanges.

All of the big U.S. banks that have released first-quarter results have reported lower revenue from investment banking and trading, but earnings have generally topped low expectations.

"It must be said that if these markets were to continue as is, our goals would be extremely difficult to achieve and we would there for take additional appropriate actions," Chief Executive James Gorman said on a conference call on Monday.

Morgan Stanley's shares were up 0.9 percent at $26.00 in premarket trading. The stock fell about 21 percent in the quarter - the sharpest decline of any big U.S. bank.

The bank's return on average common equity was 6.2 percent in the quarter ended March 31, well below the 10 percent target set by Gorman, who described the outcome as "not acceptable."

Stephen Biggar, an analyst at Argus Research, said it would be "very difficult" to achieve the 10 percent target with revenue as muted as it was in the quarter.

Earnings applicable to common shareholders fell 54.4 percent to $1.06 billion, or 55 cents per share, from a year earlier, when the bank reported its most profitable quarter since the financial crisis.

Analysts on average had expected earnings of 46 cents per share, according to Thomson Reuters I/B/E/S.

Net revenue fell 21.3 percent to $7.79 billion, missing the average estimate of $7.87 billion.

CHANGING FOCUS

Morgan Stanley, which like other banks has increasingly focused on expenses to make up for weak revenue, said it cut compensation costs by 18.6 percent in the quarter.

The bank said in January it was looking to save up to $1 billion by 2017 through technology and moving jobs to less expensive locations.

About 40 percent of Morgan Stanley's back-office employees currently sit in lower-cost locations. Pruzan said the bank would like to increase this to 50 to 55 percent.

"The current numbers you see running through the expense line are from tightening up on discretionary spending," he said.

"There are areas that are starting to take shape but we’ll see the actual savings from those towards the end of the year and next year."

Adjusted revenue from fixed income and commodities trading slid 54.1 percent in the quarter, while equities trading revenue fell 9.3 percent.

Morgan Stanley has been shifting its focus away from more volatile areas such as bond trading and towards more stable and less capital-intensive businesses such as wealth management.

Wealth management revenue fell 4.3 percent to $3.67 billion during the quarter, but this accounted for 47 percent of net revenue compared with 39 percent in the same period of 2015.

Investment banking revenue, which includes fees from mergers and income from equity and debt underwriting, fell 18.4 percent to $1.11 billion.

Still, the business was now showing signs of life, Gorman said. "The M&A pipeline is strong and some green shoots suggest the equity underwriting calendar may open up," he said.

Industrywide investment banking fees fell 29 percent in the period, the worst first-quarter since 2009, according to Thomson Reuters data. (tmsnrt.rs/1TWaz4p)

Morgan Stanley ranked second globally in mergers advisory for the quarter, behind Goldman Sachs Group Inc (GS.N), Morgan Stanley's traditional rival, which will wrap up the earnings season for big U.S. banks on Tuesday.

Reuters

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