Morgan Stanley earnings drop 42%

Morgan Stanley, which reported the first loss in its history three months ago, said earnings fell 42 percent, less than analysts estimated, as investment banking fees dwindled and loan values declined.

First-quarter net income dropped to $1.55 billion, or $1.45 a share, from $2.67 billion, or $2.51, a year earlier, the second-biggest US securities firm said yesterday. The average estimate for the three-month period ended Feb 29 was $1.01 a share, according to a Bloomberg survey of 17 analysts.

Chief Executive Officer John Mack, who called the fourth- quarter loss "embarrassing", follows his counterparts at New York-based rivals Goldman Sachs Group Inc and Lehman Brothers Holdings Inc in seeking to allay investors' concerns about a cash crunch on Wall Street. Bear Stearns Cos, the fifth-largest securities firm, sought emergency funds from the Federal Reserve last week before agreeing to a takeover by JPMorgan Chase & Co for a fraction of its market value.

"Liquidity will be something that investors will look at closely," said Kenneth Crawford, a senior portfolio manager at St. Louis-based Argent Capital Management LLC, which oversees $900 million and holds Morgan Stanley shares, before the earnings were announced.

Total revenue

In the first quarter, Morgan Stanley's revenue fell 17 percent to $8.3 billion. Return on equity, a measure of how effectively the firm reinvests earnings, dropped to 19.7 percent from 30.9 percent a year earlier.

Morgan Stanley said revenue at its fixed-income sales and trading group dropped 15 percent to $2.9 billion, still its second-highest ever, after total asset writedowns of $2.3 billion linked to the collapse of the subprime mortgage market and leveraged loans.

Investment-banking revenue rose 19 percent to $980 million, and revenue from equity sales and trading climbed 51 percent to $3.3 billion. Revenue at the global wealth-management unit increased 6 percent to $1.6 billion.

"We have concerns about the capital-market sensitive businesses, a lot of the markets in which they operate are either severely depleted or shut down," said William Fitzpatrick, an analyst at Optique Capital Management Inc in Racine, Wisconsin, which oversees $1.6 billion and sold its Morgan Stanley stock two months ago. "We wanted out of the investment banks."

Cash stockpile

Goldman, the world's biggest securities firm by market value, on Tuesday reported its steepest profit decline since 1999 as it took $2 billion of writedowns on loans and mortgages, and as revenue from investment banking and trading dwindled. The 53 percent drop was less severe than analysts had estimated, and Chief Financial Officer David Viniar said the company's stockpile of cash and liquid assets was "stronger than it's ever been".

As of Nov 30, Morgan Stanley had $118 billion in so-called liquidity reserves, which includes cash deposits with banks and high-quality securities that can be used as collateral, according to a regulatory filing.

The reserve included $62 billion at the parent company, $22 billion at bank subsidiaries and $34 billion in non-bank units.

Some of Morgan Stanley's trading businesses, including the prime brokerage unit that serves hedge funds, may win customers from Bear Stearns, Argent's Crawford said.

Goldman said that revenue from prime brokerage climbed 38 percent from a year ago as the firm won business from new and existing clients.

Agencies

(China Daily 03/20/2008 page16)