Morgan Stanley’s (MS) first quarter 2011 adjusted earnings from continuing operationscame in at 46 cents per share, way ahead of the Zacks Consensus Estimate of 35 cents. This represents Morgan Stanley’s seventh consecutive quarter of income from continuing operations, post economic crisis. However, results compare unfavorably with earnings from continuing operations of $ 1.03 in the year-ago quarter.
Earnings for the reported quarter leave out a loss of 26 cents per share (after tax) cropping up from its 40% stake in a Japanese securities joint venture (MUMSS) and a tax benefit of 30 cents related to a deferred tax asset. Considering these non-recurring items, the company reported earnings from continuing operations of $ 966 million or 50 cents per share, compared with $ 1.8 billion or $ 1.03 per share a year ago.
Considering discontinued operations, Morgan Stanley reported net incomeof 50 cents per share, compared with 99 cents in the prior-year quarter.
Better-than-expected results were primarily aided by a strong investment banking performance. The increase in revenues from Global Wealth Management Group was also impressive. The quarter also witnessed strong client franchise andimproved performance in many of its businesses. However, reduced top line and higher non-interest expenses were the headwinds.
With robust M&A activity, Morgan Stanley ranked #1 in global announced and completed M&A during the quarter. Strong performance in equity sales also helped it rank #3 in global Equity.
Quarter in Detail
Net revenues for the quarter decreased 16% year over year to $ 7.6 billion. This also compares unfavorably with the Zacks Consensus Estimate of $ 8.0 billion. Revenues for the reported quarter included negative revenue of $ 189 million pertaining to debt-related credit spreads compared with positive $ 54 million in the year-ago quarter.
Net interest income was $ 1 million, down from $ 252 million in the prior quarter and $ 368 million in the year-ago quarter. The decrease was primarily a result of higher interest expense.
Total non-interest revenues inched up 1% sequentially but decreased 12% year over year to $ 7.6 billion. Lower principal transactions were primarily responsible for the year-over-year decline.
Total non-interest expenses increased 2% sequentially and 3% year over year to $ 6.8 billion. Total compensation expenses increased 7% sequentially but decreased 2% year over year to $ 4.3 billion, while total non-compensation expenses decreased 5% sequentially and increased 13% year over year to $ 2.4 billion. Morgan Stanley’s compensation to net revenue ratio for the reported quarter was 57% (52% excluding the MUMSS loss) compared with 52% in the prior quarter and 49% in the year-ago quarter.
Segment Results
Institutional Securities’ pre-tax income from continuing operations was $ 397 million compared with $ 2.1 billion in the prior-year quarter. Net revenues in this segment were $ 3.6 billion, including the loss of $ 655 million related to MUMSS, down from $ 5.3 billion in the year-ago quarter.
Global Wealth Management’s pre-tax income from continuing operations was $ 348 million, up 25% from $ 278 million in the year-ago quarter. Net revenues were $ 3.4 billion, up from $ 3.1 billion in the year-ago quarter. The increase primarily reflects higher commissions and asset management revenues.
Asset Management’s pre-tax income from continuing operations was $ 127 million, down 27% from $ 174 million in the year-ago quarter. Net revenues for the reported quarter were $ 626 million, down 4% from $ 653 million in the year-ago quarter. Net revenues decreased as improved results in the Traditional Asset Management business were offset by lower gains on principal investments in the Real Estate Investing business.
As of March 31, 2011, total assets under management were $ 284 billion, up 8% from $ 262 billionas of March 31, 2010, reflecting market appreciation and net customer inflows primarily in liquidity funds.
Capital Ratios
At March 31, 2011, book value per share was $ 31.45, down from $ 31.49 at December 31, 2010. Morgan Stanley’s Tier 1 capital ratio, under Basel I, was approximately 16.7% and Tier 1 common ratio was approximately 11.8% as of March 31, 2011.
Dividend Update
Concurrent with the earnings release, Morgan Stanley declared a quarterly dividend of 5 cents per share. The dividend will be paid on May 13to shareholders of record on April 29.
Position of Competitors
Morgan Stanley’s close competitors –– Citigroup Inc. (C) and The Goldman Sachs Group Inc. (GS) –– have reported mixed first quarter results.
Citigroup marginally surpassed the Zacks Consensus Estimate. However, results fell short of the year-ago quarter’s earnings. The slightly better-than-expected result was driven by a fall in provisions for credit losses as well as benefits and claims. Yet the top-line headwind at Citigroup continued, with revenue dropping from the prior-year period and falling shy of the Zacks Consensus Estimate. Expenses also increased year over year.
On the other hand, Goldman’s profit came in way ahead the Zacks Consensus Estimate. Coupled with the improving economic conditions, the company gained from a solid balance sheet and global clients. Considering prior-year quarter comparison, total revenue increased, though poor performance was recorded at the Institutional Client Services division. Yet, operating expenses also increased.
Our Viewpoint
We anticipate the restructuring initiatives to reduce balance sheet risk will improve its valuation over time. Moreover, its inorganic growth initiatives continue to be significant growth drivers. Nevertheless, the company is facing major headwinds to stay competitive and regain its industry-leading position. Also, there are concerns related to its financials being marred by new regulatory restrictions and its inability to enhance shareholder value as the company was not granted the green signal to raise dividend following the Federal Reserve’s second round of stress tests.
Morgan Stanley currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. We also maintain a long-term “Underperform” recommendation on the stock.
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