Morgan Stanley's Quarterly Profit Falls 42%
Money/CNN
March 19, 2008

BOSTON (Dow Jones) -- Morgan Stanley's first-quarter net earnings dropped 42% as revenue also fell, the investment bank said Wednesday, but the results beat consensus forecasts that have been knocked down by the credit crunch.

The company (MS) reported income of $1.56 billion, or $1.45 a share, compared with $2.67 billion, or $2.51 a share, earned in the year-earlier first quarter. Net revenue fell 17% to $8.32 billion, the company said.

Analysts had, on average, forecast a quarterly profit of $1.03 a share as well as revenue of $7.19 billion for the three months ended Feb. 29.

The stock was up more than 9% in early trading Wednesday as the mortgage and credit-related write-downs weren't as big as expected.

Morgan Stanley said net income included the results of Discover Financial Services (DFS) and Quilter Holdings Ltd., which were reported as discontinued operations.

Morgan Stanley took mortgage-related trading net write-downs totaling $1.2 billion during the latest quarter. Additionally, it booked net losses of $1.1 billion tied to marking down the value of loans as well as closed and pipeline commitments.

Investment-banking revenue was $980 million, which included advisory revenue that rose 19% from a year ago to $444 million, Morgan Stanley said.

The company said its asset-management business faced "challenging market conditions" punctuated by losses in real estate and structured investment vehicles, resulting in quarterly losses of $161 million before taxes.

"Despite turbulent markets, Morgan Stanley achieved strong performance across many of our businesses," said Chief Executive John Mack in the company's earnings release.

"While many of our businesses are facing challenging market conditions that we expect to continue in the months ahead, we are satisfied with how Morgan Stanley navigated the ongoing market turbulence," the CEO added.

Net revenue at the institutional-securities business fell 13% from the previous year to $6.21 billion, but that's still the third-highest quarter ever, the company said. Equity sales and trading revenue gained 51% to a record $3.3 billion due to strength in derivatives and prime brokerage, which services hedge funds.

Fixed-income sales and trading revenue fell 15% from the prior year's record to $2.9 billion. Morgan Stanley's record revenue in the interest rate, credit and currency business was offset by the mortgage write-downs, the firm said.

The company also said its board approved the appointment of a new chief risk officer, Ken deRegt.

Morgan Stanley said it has not bought back any stock so far this fiscal year.

Banc of America Securities analyst Michael Hecht in a research note called Morgan Stanley's remaining balance-sheet exposure to mortgages and other loans " manageable" compared with peers. He reiterated his buy rating on the stock. During the conference call later Wednesday, Hecht said he'll be looking for details on the possibility of further write-downs on commercial real estate and residential mortgages.

Morgan Stanley shares rose more than 17% during Tuesday's market surge, sparked in part by the latest Federal Reserve interest-rate cut. Stocks rallied after falling Monday on news that the Fed played a role in J.P. Morgan & Chase Co.'s (JPM) deal to buy Bear Stearns Cos. (BSC), which has been rocked by the subprime mortgage fallout.

Lehman Brothers Holdings Inc. (LEH) and Goldman Sachs Group Inc. (GS) on Tuesday both reported quarterly profits that declined more than 50%. However, both sets of results came in ahead of expectations.

Original Text