Morgan Stanley reported a 50 percent drop in earnings that was bigger than analysts estimated as revenue from trading stocks and bonds declined the most among Wall Street banks.
Second-quarter profit was $591 million compared with $1.19 billion a year earlier, the New York-based company said Thursday. Excluding accounting adjustments tied to the firm's own credit spreads, profit was 16 cents a share, below the 29- cent average estimate of 20 analysts surveyed by Bloomberg.
The 48 percent drop in trading revenue, which plunged to the lowest level since Chief Executive Officer James Gorman took over in January 2010, compares with an increase of more than 11 percent at Goldman Sachs Group Inc. Morgan Stanley is trading at about half its liquidation value and has dropped the most this year of any of the 10 largest U.S. lenders.
"It was an exceptionally difficult quarter with all of the problems, particularly in Europe," Gary Townsend, head of Hill Townsend Capital LLC, said in a Bloomberg Radio interview before results were released. "It really does require that we have a rebound, if that's possible, in the economy" before Morgan Stanley might recover, Townsend said.
Morgan Stanley fell 5.9 percent to $13.16 at 7:59 a.m. in New York. The shares were down 7.5 percent this year through Wednesday, after falling 44 percent in 2011, and are 53 percent below where they traded when Gorman took over.
Revenue dropped to $6.95 billion from $9.21 billion a year earlier. Book value per share rose to $31.02 from $30.74 at the end of March. The firm's return on equity, a measure of how well it reinvests earnings, was 4 percent, below Gorman's goal of 15 percent.
Second-quarter revenue from fixed-income sales and trading, which is run by Ken deRegt along with commodity trading co-heads Colin Bryce and Simon Greenshields, was $770 million, excluding the accounting gain. That missed estimates of $1.1 billion from Citigroup Inc.'s Keith Horowitz, and $1.39 billion from Barclays Plc's Roger Freeman.
The accounting gain is known as a debt-valuation adjustment, or DVA. It stems from decreases in the value of the company's bonds, under the theory it would be cheaper to buy back the debt. Morgan Stanley booked $2 billion of losses in the first quarter as its credit spreads tightened.
Fixed-income revenue was down 70 percent from $2.59 billion in the first quarter and 59 percent from $1.9 billion in the second quarter of 2011. Goldman Sachs's fixed-income revenue, excluding DVA, climbed more than 40 percent from a year earlier to $2.19 billion. Citigroup's fell 4 percent to $2.82 billion, while JPMorgan Chase & Co. posted a 17 percent decline to $3.49 billion.
In equities trading, headed by Ted Pick, Morgan Stanley's revenue fell 36 percent from the year-earlier period to $1.14 billion, excluding DVA. That was a 38 percent decline from the first quarter's $1.83 billion, and compared with $1.7 billion at Goldman Sachs and $1.04 billion at JPMorgan. Brad Hintz, an analyst at Sanford C. Bernstein, had estimated revenue of $1.45 billion, while Barclays's Freeman estimated $1.38 billion.
Citigroup on July 16 beat analysts' estimates on revenue from advising on mergers, corporate lending and underwriting stocks and bonds. Goldman Sachs said the next day it plans to cut $500 million in expenses after reporting the lowest first- half revenue and earnings in seven years. Both companies are based in New York.
The two companies cited a decline in trading and merger volume amid concern that Greece would leave the euro and the region's debt crisis would spread to nations including Spain and Italy.
Morgan Stanley is eliminating fewer than 100 jobs, primarily from its trading business in Europe and Asia, in response to the difficult environment, people briefed on the plans have said.
Morgan Stanley's credit-default swaps have fallen since June 21, when Moody's Investors Service cut the firm's credit rating two grades instead of the threatened three levels. Morgan Stanley avoided the biggest potential downgrade among U.S. firms because of support from Mitsubishi UFJ Financial Group Inc., its largest shareholder, Moody's said.
The firm had to post collateral of $2.9 billion as a result of the downgrade, the company said today.
Morgan Stanley generated $884 million in second-quarter revenue from investment banking, which is overseen by Paul J. Taubman. That figure, down 40 percent from a year earlier, included $263 million from financial advisory, $283 million from equity underwriting and $338 million from debt underwriting.
Morgan Stanley was the second-ranked equity underwriter in the quarter, according to data compiled by Bloomberg. It was the lead underwriter on Facebook Inc.'s initial public offering, which set a record for technology companies by raising more than $16 billion. The stock has dropped 23 percent since the IPO, leading to shareholder lawsuits claiming the company and its underwriters overpriced Facebook at $38 a share.
Morgan Stanley said it adhered to the same procedures it follows for all IPOs and complied with all applicable regulations.
Global wealth management, overseen by Greg Fleming, posted pretax income of $393 million, up from $317 million a year earlier, as revenue fell 4 percent to $3.31 billion. The division's pretax profit margin rose to 12 percent from 9 percent in the second quarter of 2011.
Gorman has said the bank is finishing the technology integration of the Morgan Stanley Smith Barney brokerage this month, hoping to improve profitability toward his target of a 20 percent pretax margin. The figure was 11 percent in the first quarter, and Fleming has vowed to raise the margin to "mid- teens" by the middle of next year.
Morgan Stanley said in May it would exercise the option to buy a 14 percent stake in the venture from Citigroup, increasing its ownership to 65 percent. Citigroup Chief Financial Officer John Gerspach said this week that his bank expects the two estimates of the unit's value to be more than 10 percent apart, requiring a third-party appraiser to complete the deal.
Asset management reported a pretax gain of $43 million, down from $168 million in the previous year's period.
Compensation and benefits decreased 21 percent from the year-earlier quarter to $3.63 billion, or 52 percent of the firm's overall revenue. The ratio was higher than in the second quarter of 2011, when the bank set aside 50 percent of revenue.