A sharp drop in bond trading revenues and deep losses at a Japanese investment led to a 48 percent decline in Morgan Stanley's first-quarter income.
The New York investment bank booked $655 million in losses from its 40 percent stake in a Japanese joint venture, Mitsubishi UFJ Morgan Stanley Securities. The venture lost more than $1 billion from bets in the fixed income markets, while operating expenses soared.
The joint venture was part of a $9 billion investment that Morgan Stanley received from Mitsubishi at the height of the financial crisis in 2008. Morgan Stanley's chief financial officer, Ruth Porat, said in a conference call with analysts Thursday that Mitsubishi is replacing the leadership at the joint venture and has started a "thorough and strategic risk management review" there.
Mitsubishi is also converting its $7.8 billion convertible preferred shares into common shares in Morgan Stanley, pending a review by U.S. regulators. The move will save Morgan $784 million in annual dividends and give Mitsubishi a 22.4 percent stake in Morgan Stanley.
Investors liked what they heard. Morgan Stanley's stock rose 1.7 percent to close at $26.48 Thursday.
Morgan Stanley earned $736 million in the first quarter, or 50 cents per share, compared with $1.4 billion, or 99 cents a share, in the same period last year. Revenue fell 16 percent to $7.6 billion. Morgan Stanley's revenues from its fixed income and commodities sales and trading division dropped to $1.8 billion from $2.7 billion in the same quarter last year.
Other parts of Morgan Stanley's investment banking business fared better than bond trading. Revenues from underwriting stock and debt offerings increased 11 percent, and revenues from advisory services rose 18 percent.
Though Morgan Stanley's performance was similar to its Wall Street peers, its revenues from trading and selling securities dropped at a sharper rate. Goldman Sachs Group Inc. and the investment banking divisions of JPMorgan Chase & Co. and Bank of America Corp. also reported lower revenues from trading and higher revenues from underwriting.
Morgan Stanley's wealth management business, the Morgan Stanley Smith Barney joint venture with Citigroup Inc., posted better results. Revenues rose to $3.4 billion from $3.1 billion a year ago on higher commissions and asset management fees.
"Despite a little bit of a slowdown after the Japan and Middle east crises, the confidence of the retail investor has remained strong," said Porat in an interview.