Morgan Stanley's loss is narrower than expected

AP News
Posted: Jan 19, 2012 6:20 PM
Morgan Stanley's loss is narrower than expected

Morgan Stanley posted a fourth-quarter loss of $275 million Thursday, its first since early 2009, dragged down by the cost of a settlement over soured mortgage securities.

But the loss was far smaller than investors were expecting, and the company's stock rose over 5 percent. Morgan Stanley's loss was equivalent to 15 cents per share, versus the 43 cents analysts were predicting, according to FactSet.

The loss stemmed from Morgan Stanley's settlement last month with insurance company MBIA, an agreement that slashed earnings by 59 cents per share. MBIA had accused Morgan Stanley of being misleading about the quality of commercial mortgage-backed securities for which it bought insurance.

Morgan Stanley and other banks accused the insurer of restructuring itself to avoid paying the banks' claims. While the settlement took a deep hit on quarterly results, Morgan Stanley portrayed it as one of its final steps in cleaning up problems dating from the financial crisis.

"For the first time in two years, our to-do list is not our problem list," CEO James Gorman said in a call with analysts.

Glenn Schorr, an analyst at Nomura Equity Research, said that Morgan Stanley's earnings were better than expected, excluding the MBIA-related loss, and its stock trading fell less than at other banks. Overall, Schorr said, Morgan Stanley is "making progress cleaning up legacy issues" but "is still a work in progress."

Like its peers, Morgan Stanley has been trimming expenses and cutting jobs as the economy continues to struggle. It shed about 700 employees last year, or about 1 percent of its workforce, bringing its total down to about 61,900 at year's end, and more jobs cuts are on the way.

The bank says it is examining expenses rigorously, cutting back on travel and looking at all costs, from Bloomberg terminals to consultants. It's also considering restructuring plans that could include outsourcing some technology functions or consolidating legal units.

Even so, the average compensation Morgan Stanley paid for the year was $265,000, up from about $255,000 the year before. The bank said this was related to its transition to defer bigger portions of some workers' bonuses.

The bank has also capped the amount that workers can get in their bonus immediately: Anything over $125,000 will be deferred.

Morgan Stanley's main rival, Goldman Sachs, made even deeper cuts, slashing its work force 7 percent and its compensation 21 percent. That pushed Goldman's stock up 7 percent on Wednesday, even though it also announced a 30 percent drop in quarterly revenue.

Morgan Stanley is also figuring out how to redefine itself as new government regulations crimp former sources of revenue, including certain complicated investment vehicles. New rules will also require banks to hold more capital.

Revenue fell 26 percent from a year ago to $5.7 billion. The institutional securities unit, which helps clients with investment banking services like packaging securities and raising capital, reported a 42 percent decline in revenue.

Though investment banking is always volatile, the risks are more pronounced at Morgan Stanley. Unlike some of its rivals, like JPMorgan Chase & Co. and Bank of America Corp., Morgan Stanley doesn't have a large consumer deposit base to rely on when its investment bank stumbles. Some customers, the bank said, held off on deal-making over the year because of turbulence in financial markets brought on by Europe's debt crisis.

Porat said on the conference call that uncertainty about Europe was a "big cloud" over earnings growth. However, Gorman added that he didn't buy into the "hysteria" around concerns over European countries' debt obligations.

"Europe is more likely than not to resolve itself," Gorman said, though he added it would require "a couple of years, not a couple of weeks."

Gorman, who became CEO two years ago, has been slimming down the bank, selling off units like a mortgage servicing division and an asset management business. He's been emphasizing divisions like wealth management, which provide smaller returns than some investment banking operations used to but also carry a lot less risk because they're based on fees rather than markets.

Despite those efforts, Morgan Stanley's wealth management unit struggled in the quarter. Revenue fell 3 percent and profit fell 20 percent for the unit, which offers financial planning for wealthy individuals and small to medium-sized businesses. Asset management, which manages investment portfolios, also reported lower revenue and profits, thanks in part to souring investments in real estate.

Morgan Stanley's stock jumped 5.4 percent Thursday to close at $18.28.