Morgan Stanley reported an 8% drop in fiscal third-quarter net income, but easily topped Wall Street expectations, calming nerves after a tumultuous day that began with Goldman Sachs Group Inc., the only other remaining independent brokerage firm, report results that came in just above expectations.
"Despite unprecedented market conditions, Morgan Stanley's core client franchise achieved solid revenue growth, profitability and ROE this quarter. Our people delivered particularly strong performance across our prime brokerage, commodities, foreign exchange and equities businesses, and we saw continued growth in our international business," Morgan Stanley Chairman and Chief Executive John J. Mack said. "We have continued to actively reduce our legacy positions and carefully manage our risk, capital and liquidity."
Along with a 70% decline in quarterly income posted by larger rival Goldman Sachs Group Inc. Tuesday, the results from Morgan Stanley show that even some of the strongest Wall Street firms have been hurt by deteriorating market conditions.
In after-hours trading, shares of Morgan Stanley rose 6.4% to $30.53.
Morgan Stanley and Goldman are the only large brokerages still standing after Lehman Brothers Holdings Inc. filed for bankruptcy Monday, Merrill Lynch & Co. agreed Sunday to be bought by Bank of America Corp., and Bear Stearns was acquired by JPMorgan Chase & Co. in March.
For the quarter ended Aug. 31, investment bank Morgan Stanley reported net income of $1.43 billion, or $1.32 a share, down 7% from $1.54 billion, or $1.44 a share, a year earlier.
Net revenue rose 1% to $8.05 billion.
Analysts polled by Thomson Reuters had been expecting earnings of 78 cents a share on $6.32 billion in revenue.
Return on equity, an important profitability measure at financial firms, slid to 16.5% from 17.1%.
Investment banks, commercial banks and insurers all made bad bets that housing prices would stay firm after years of record gains. The bets were unusually large and leveraged at Lehman Brothers Holdings Inc., Merrill Lynch and Bear Stearns Cos.
Morgan Stanley also embarrassed itself with some of its mortgage bets last year, but it had managed to soothe investors since then, as it scaled back on risky exposures. As a result, it was seen, along with Goldman — which had correctly bet that subprime mortgages would crater — as one of the strongest large independent firms on Wall Street.
But now that it and Goldman are the only ones left, investors are worried even they might not last on their own. If conditions keep worsening, the firms' leverage and remaining real-estate and credit exposure could put their funding models at risk.