Morgan Stanley posted a $2.2 billion fourth-quarter loss, wider than the most pessimistic analyst's estimate, as it unexpectedly wrote down the value of fixed-income businesses and lost money in all three of its main divisions.
The loss of $2.24 a share for the three months ended November 30 compared with a $3.59 billion loss, or $3.61, in the same period a year earlier, the New York-based company said on Wednesday in a statement. The average estimate of 16 analysts surveyed by Bloomberg was for a 34-cent loss, with no estimates exceeding $1.15. The shares fell as much as 7.8 per cent.
“I don't think anybody estimated the impact of the price destruction that took place in November,” Colm Kelleher, Morgan Stanley’s chief financial officer, said in an interview today. “We felt the fixed-income businesses were impaired by what took place in the quarter.”
Chief Executive Officer John Mack, who led the firm to its smallest annual profit in 13 years, is forgoing his bonus as the firm reinvents itself to survive the global credit crisis. Goldman Sachs Group Inc, Morgan Stanley’s larger rival, yesterday reported a $2.1 billion fourth-quarter loss that was smaller than some analysts expected. Its shares rose as much as 2 per cent on Wednesday.
Morgan Stanley, which converted to a bank during the quarter and accepted $10 billion in government bailout funds, took a $700 million writedown on the value of its Saxon Capital Inc mortgage division, TransMontaigne Inc. fuel-distribution company and Heidmar Inc., a US oil-tanker business, Kelleher said. Most of the writedown was related to Saxon, which Morgan Stanley bought in 2006 for about $706 million in cash.
Shares Decline: Morgan Stanley fell $1.25 to $14.88 in New York Stock Exchange composite trading at 10:10 am.
Of the five biggest US securities firms, Goldman Sachs and Morgan Stanley are the only ones to survive this year after Lehman Brothers Holdings Inc went bankrupt, Merrill Lynch & Co was sold to Bank of America Corp and Bear Stearns Cos. was acquired by JPMorgan Chase & Co.
“Exceptional market conditions profoundly impacted our performance this year, especially in the fourth quarter,” Mack, 64, said in the statement. “We still achieved three quarters of profitable results and are moving aggressively to reposition the firm for the future.”
The company reports earnings from continuing operations to exclude the Discover credit-card unit it sold last year. Net income for 2008 dropped to $1.71 billion, the lowest since 1995.
Rating Cut: Moody’s Investors Service Inc downgraded Morgan Stanley to A2 from A1 after earnings were released, citing “weak” results and an erosion in the firm’s key businesses. Moody's cut Goldman Sachs to A1 from Aa3 on Tuesday.
Banks and brokerages worldwide have disclosed $800 billion of writedowns and credit losses since the collapse of the subprime mortgage market last year, which led to a slump in markets ranging from commercial real estate to private equity, according to data compiled by Bloomberg.
Morgan Stanley today reported fourth-quarter mortgage- related losses of $1.2 billion, which were more than offset by net revenue of $2.7 billion from the widening of Morgan Stanley's credit spreads. The firm had mark-to-market losses of $1.7 billion on leveraged loans and leveraged-loan commitments, and writedowns of $800 million on securities in the firm's subsidiary banks. Those losses were offset by gains of $1.1 billion related to debt hedges.
Investment Losses
The company also booked $1.8 billion in investment losses during the quarter from real-estate funds and other principal investments.
David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, estimated on Dec. 2 that Morgan Stanley would have $2.8 billion of credit-market writedowns and $1.5 billion of private- equity losses.
''The real question is when do they expect the write-offs to stop?'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York, which manages $150 million including Morgan Stanley stock. ''It's important these companies continue to shrink their balance sheets and get exposures reduced.''
Total assets on Morgan Stanley's balance sheet declined to $658 billion from $987.4 billion at the end of August, reducing the firm's ratio of assets to equity. Goldman Sachs said yesterday it cut assets 18 percent to $885 billion in the quarter, reducing leverage to 13.7 times equity from 23.7 times at the end of August.
Balance Sheet
Kelleher said he is ''pretty comfortable'' with a balance sheet of about $750 billion, and called the current level ''pretty low as we de-risk for this market.''
Morgan Stanley's book value per share, an indication of how much value would be left if assets had to be liquidated, declined to $30.24 in the quarter from $31.25 at the end of August. Return on equity, a gauge of how effectively the firm invests earnings, fell to 5.2 percent for the year from 7.8 percent in 2007.
About three to five percentage points of the drop in return on equity was the result of lower leverage, Kelleher said. He expects the ratio to be around 12 percent to 15 percent and said it will increase with growth in the firm's brokerage and asset- management units, which generate higher returns.
Full-year revenue declined 12 percent to $24.7 billion, while compensation and benefits expenses, Morgan Stanley's largest cost, decreased 26 percent to $12.3 billion.
The company said today it expects about $2 billion in cost savings from job cuts already announced and other expense reductions. The bonus pool, excluding pay for financial advisers, dropped about 50 percent this year, the firm said.
Institutional Securities
In the fourth quarter, revenue from institutional securities was $844 million, compared with a loss of $3.4 billion a year earlier. The division had a pretax loss of $2.08 billion, compared with a loss of $6.46 billion in the same period of 2007.
Morgan Stanley said last month it was cutting 10 percent of the jobs in the institutional securities division and 9 percent of the positions in asset management to help offset lower revenue. The company also said it was hiring two Wachovia Corp. executives to build a new consumer-banking division as part of an effort to attract deposits.
Fixed-income sales and trading recorded $1.2 billion in lost revenue in the quarter, compared with a $7.9 billion net loss in the same quarter of 2007. Equity sales and trading revenue fell to $1.7 billion from $2.5 billion, a 30 percent decline. Advisory revenue dropped 32 percent to $528 million, while underwriting revenue decreased 63 percent to $215 million.
Asset Management
Asset management posted a $1.22 billion loss in the quarter, bringing the unit's full-year loss to $1.81 billion, compared with a $1.47 billion pretax profit in 2007. Funds under management or supervision were $399 billion, down 33 percent.
Revenue in Morgan Stanley's global wealth management business was down 21 percent to $1.4 billion in the quarter from $1.8 billion a year earlier. The division posted a pretax loss of $55 million versus a profit of $378 million in the same period last year. For the full year, global wealth management had pretax earnings of $1.15 billion on revenue of $7.02 billion, compared with $1.16 billion on revenue of $6.63 billion in 2007.
Mike Morcos, a senior portfolio manager at Old Second Wealth Management in Aurora, Illinois, said the government's $10 billion investment in Morgan Stanley has put the firm in ''the circle of chosen ones.''
''They're going to have to reinvent themselves and they have smart people there so I think they'll do that, but I don't think things will be too easy for them,'' said Morcos, who oversees $1 billion and doesn't own Morgan Stanley shares. ''I have a hard time seeing how they're going to generate any kind of significant earnings without the type of leverage they've had in the past.''
To contact the reporter on this story: Christine Harper in New York
