Morgan Stanley posts 3Q loss on special charges

AP News
Posted: Oct 20, 2010 5:47 PM
Morgan Stanley posts 3Q loss on special charges

Morgan Stanley became the latest investment bank to report weaker results Wednesday from a trading slowdown during the summer.

The New York-based bank reported a net loss during the third quarter as revenue fell 20 percent and because of some special one-time charges. Even stripping out the charges, adjusted earnings tumbled from the year-ago period.

Morgan Stanley's CEO James Gorman said in a statement: "Our results in aggregate clearly do not reflect the true potential of Morgan Stanley's global client franchise and I am not satisfied with our overall performance."

The bank's shares closed down a penny at $25.38 as broader markets rallied.

Paul Zubulake, a senior analyst at Aite Group, said Morgan Stanley was up against the same problems other investment banks were facing. Economic, regulatory and political uncertainty all factored into a slowdown in trading and market activity, he said.

"There's just less risk-taking going on," Zubulake said.

Morgan Stanley was hurt, like competitors Goldman Sachs Group Inc. and JPMorgan Chase & Co., as customers significantly ratcheted back on investing. Everyone from retail investors to large institutions scaled back their trading during the summer because of worries about the health of the economy and a general lack of volatility that often propels trading.

"It was a really protracted slowdown reflecting ongoing uncertainty in the markets," Ruth Porat, Morgan Stanley's chief financial officer said in an interview with The Associated Press.

Morgan Stanley was especially hard-hit by a slowdown in bond trading and underwriting stock offerings. Porat said the pace had started to pick up in September but that it was too early to tell if the gains would continue.

Craig Fehr, a senior financial services analyst for Edward Jones, said growth in the investment banking division is likely to be moderate over the next year as customers slowly re-enter financial markets. He predicted growth could be between 6 percent and 8 percent during the next 12 months.

Morgan Stanley's overall revenue fell 20 percent to $6.8 billion in the third quarter, but that was still ahead of the $6.4 billion forecast by analysts polled by Thomson Reuters.

The bank's net loss applicable to common shareholders was $91 million, or 7 cents per share, during the quarter, compared with earnings of $498 million, or 38 cents per share, during the same quarter last year.

Morgan Stanley would have earned a profit if it wasn't for special charges it took to cut the value of an investment it plans to sell and the changing value of its own debt.

Earnings from continuing operations totaled $313 million, or 5 cents per share, a 67 percent drop from the $936 million, or 50 cents per share, earned during the same quarter last year.

Stripping out special charges and discontinued operations, Morgan Stanley earned 23 cents per share, during the most recent quarter.

One of the biggest drivers of the loss was a $731 million charge Morgan Stanley took to reflect the greater cost it would incur to repurchase outstanding debt, which is worth more now because of the bank's improving financial condition. That reduced earnings by 30 cents per share.

The New York-based investment bank was on the brink of collapse during the depths of the financial crisis in late 2008. As the company received new investments and expanded its retail brokerage business through the purchase of Smith Barney, it recovered. With that recovery the price of its debt rose.

Banks must account each quarter for how much it would cost to buy back all its outstanding debt.

Morgan Stanley also took a $229 million charge as it slashed the value of its investment in Revel Entertainment Group, an Atlantic City, N.J. casino operator it plans to sell.

Quarterly results got a 12 cent per share lift from a one-time tax gain.