Revenue Drops 62% as Morgan Stanley Posts a Loss
By DAVID JOLLY
Published: April 22, 2009
Morgan Stanley reported a bigger-than-expected first-quarter loss on Wednesday, as it wrote down soured real estate investments and took a hit on its own debt.
The bank reported a net loss of $177 million, or 57 cents a share, compared with a profit of $1.4 billion a year ago. Revenue fell 62 percent to $3 billion. Analysts surveyed by Reuters had expected a loss of about 9 cents a share and revenue of about $4.9 billion.
Results were helped by a one-time tax benefit of $331 million “from the anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates.”
Morgan Stanley said its results were hurt by a $1.5 billion decrease in net revenue related to the tightening of credit spreads on certain of its long-term debt and “net losses of $1 billion on investments in real estate, amidst the industry-wide decline in this market.”
Like its larger rival, Goldman Sachs, Morgan Stanley in September converted itself into a bank holding company from an investment bank in order to gain access to emergency Federal Reserve funds. Accounting rules governing holding companies required the banks to change their reporting periods to the calendar year from a Nov. 30 year-end, leaving December as an orphan month.
Morgan Stanley reported a net loss of $1.3 billion for December.
Goldman Sachs last week posted a net profit of $1.7 billion for the first quarter of 2009. For December, it lost $1 billion.
Morgan Stanley also cut its quarterly dividend to 5 cents a share from 27 cents, saying the move would allow it to conserve about $1 billion a year.
Some investors have greeted bank results in the last weeks with optimism, seeing in better-than-anticipated headline numbers signs that the financial industry is stabilizing. But many analysts have cautioned that one-time items and liberal accounting were allowing banks to dress up what would otherwise, considering the continuing deterioration of asset values, have been a bad quarter.
American banks face great uncertainty as the Treasury and financial regulators work out how they will disclose the results of stress tests of 19 large banks. American banks had reported $510 billion in write-downs related to the credit crisis by the end of 2008, the International Monetary Fund said Tuesday, and it predicted they would need to write-down an additional $550 billion in 2009 and 2010.
In spite of difficult business conditions, Morgan Stanley “delivered strong results in investment banking, commodities, interest rates and credit products as well as solid performance in global wealth management,” John J. Mack, the chairman and chief executive, said in a statement. “In fact, Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads — which is a significant positive development, but had a near-term negative impact on our revenues.”
Morgan Stanley said it had a Tier 1 capital ratio, a measure of financial strength, of 16.4 percent at the end of the first quarter. It said its investment banking business had revenue of $800 million, and that it ranked first globally in announced mergers and acquisitions in the first quarter. The bank said its fixed income sales and trading business posted revenue of $1.3 billion reflecting strong results in commodities, interest rates and credit products.
Goldman Sachs said last week that it wanted to return $10 billion in federal bailout money received under the Troubled Asset Relief Program, or TARP, as soon as possible to rid itself of the restrictions on executive pay and other matters. Morgan Stanley’s loss might make it more difficult for it to follow suit in the near term. For its part, Goldman Sachs is awaiting Treasury Secretary Timothy F. Geithner’s approval before it can do so.
Like its rivals, Morgan Stanley has also benefited from an indirect subsidy in the form of Federal Deposit Insurance Corporation backing for their debt issues, which allows them to raise money far more cheaply than they could on their own. Morgan Stanley has issued $23 billion of debt under the program.
Morgan Stanley, which sold a 21 percent stake to Mitsubishi UFJ Financial Group in September for $9 billion, entered a joint venture this year with Citigroup’s Smith Barney brokerage unit to expand its brokerage business.
It also announced a new joint venture with Mitsubishi UFJ integrating the two firms’ Japanese securities businesses into the third largest brokerage franchise in Japan.
Mr. Mack told a Japanese newspaper this week that Morgan Stanley also wanted to buy an American retail bank to gain deposits.
The bank has a market value of about $27 billion. Its shares, which had gained about 54 percent this year through the market close Tuesday, fell about 2 percent in premarket trading Wednesday.
Louise Story contributed reporting.