Morgan Stanley’s (MS) third quarter adjusted earnings from continuing operations came in at 23 cents per share, 4 cents ahead of the Zacks Consensus Estimate of 19 cents. This represents Morgan Stanley’s fifth consecutive quarter of income from continuing operations.
Adjusted earnings for the reported quarter leave out losses from changes in Morgan Stanley’s debt-related credit spreads of 30 cents per share and gain from a discrete tax item of 12 cents. Considering these non-recurring items, earnings from continuing operations came in at 5 cents compared with 50 cents in the year-ago quarter.
Including discontinued operations, Morgan Stanley reported a net loss of 7 cents per share, compared with a net income of 38 cents in the prior-year quarter.
Results were primarily affected by a decrease in the top line. Revenues for the reported quarter were negatively impacted by debt-related credit spreads. Weak performance in almost all of its businesses and a significant decrease in net interest income were also among the negatives. However, the results were aided by strong performance of Investment Banking and decrease in non-interest expenses.
Quarter in Detail
Net revenues for the quarter decreased 20% year-over-year to $6.8 billion. This also compares unfavorably with the Zacks Consensus Estimate of $6.9 billion. Revenues for the reported quarter included negative revenue of $731 million related to the debt-related credit spreads compared with negative revenue of $878 million in the year-ago quarter.
Net interest income was $105 million, down 25% sequentially and 79% year over year. Net interest income decreased primarily as a result of higher interest expense.
Total non-interest expenses decreased 4% sequentially and 14% year over year to $6.0 billion. Total compensation expenses decreased 5% sequentially and 25% year-over-year to $3.7 billion, while total non-compensation expenses decreased 3% sequentially but increased 10% year over year to $2.3 billion. The decline in compensation expenses primarily reflected lower compensation costs in Institutional Securities. Morgan Stanley’s compensation to net revenue ratio for the reported quarter was 54% compared with 58% in the year-ago quarter.
Segment Results
Institutional Securities’ pre-tax income from continuing operations was $240 million compared with $1.3 billion in the prior-year quarter. Net revenues in this segment were $2.9 billion, down 42% from $5.0 billion in the year-ago quarter.
Global Wealth Management’s pre-tax income from continuing operations was $281 million compared with $280 million in the year-ago quarter. Net revenues were $3.1 billion, up 2% from $3.0 billion in the year-ago quarter. The increase primarily reflects higher net interest revenues, offset by a decline in commissions.
Asset Management’s pre-tax loss from continuing operations was $279 million compared with a loss of $124 million in the year-ago quarter. Net revenues for the reported quarter were $802 million, up 79% from $447 million in the year-ago quarter.
As of September 30, 2010, total assets under management were $273 billion, up from $250 billion as of September 30, 2009, reflecting market appreciation partly offset by net customer outflows, primarily in Morgan Stanley’s long-term fixed income funds.
During the reported quarter, Morgan Stanley ranked #1 in global IPOs, #2 in global completed M&A, #3 in global announced M&A and #3 in global equity.
At September 30, 2010, book value per common share was $31.25, up from $29.65 at June 30, 2010. Morgan Stanley’s Tier 1 capital ratio, under Basel I, was approximately 16.5% and Tier 1 common ratio was approximately 10.8%.
Dividend Update
Concurrent with the earnings release, Morgan Stanley declared a quarterly dividend of 5 cents per share. The dividend will be paid on November 15, 2010 to shareholders of record on October 29, 2010.
Though continuing pressure on trading revenues will hurt the profitability of Morgan Stanley in the upcoming quarters, a slowdown in loan loss reserves like other large banks including Bank of America (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo (WFC) and Goldman Sachs (GS) will support the bottom-line.
Morgan Stanley is facing major headwinds to stay competitive and regain its industry leading position as its growth has been impeded by the financial crisis. Also, there are concerns related to the near-term impact of the Dodd-Frank Act on the company’s profitability. However, we believe that Morgan Stanley has the potential to realize the full benefits of its strategic and cost-cutting initiatives. Moreover, inorganic growth initiatives with a healthy balance sheet continue to be significant growth drivers.
Morgan Stanley currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.
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