Morgan Stanley Net Beats Estimates on Equity Trading

Morgan Stanley Net Beats Estimates on Equity Trading

March 19 (Bloomberg) -- Morgan Stanley, the second-biggest U.S. securities firm, reported earnings that fell less than analysts estimated as record equity sales and trading offset writedowns from the collapse of the subprime mortgage market.

Morgan Stanley rose as much as 9.8 percent in New York trading today after reporting a 42 percent drop in first-quarter net income, to $1.55 billion, or $1.45 a share. Analysts were estimating profit of $1.01 per share.

Profit and return on equity exceeded results reported yesterday by Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. as equity-trading revenue surged 51 percent. The results may ease investors' concern that access to capital is dwindling after Bear Stearns Cos. agreed to a takeover by JPMorgan Chase & Co. for a fraction of its market value.

``We had to come out of this week in regard to investment banks in general with more answers than questions,'' said Douglas Ciocca, a portfolio manager at Renaissance Financial Corp. in Leawood, Kansas, which manages $1.7 billion, including Morgan Stanley stock. ``We're certainly headed in the right direction.''

First-quarter equity sales and trading revenue climbed to $3.3 billion, the firm said in a statement, compared with a 19 percent drop reported yesterday by Goldman Sachs.

``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,'' Chief Executive Officer John Mack said in the statement.

Shares Rise

Shares of the company rose $3.02 to $45.88 at 12:09 p.m. in New York Stock Exchange composite trading, after rising to $47.07 earlier today. Morgan Stanley staged its biggest gain in more than a decade yesterday, climbing 18 percent. Financial stocks rallied after Goldman and Lehman reported profits and the Fed cut its benchmark interest rate by 0.75 percentage point.

Morgan Stanley's first-quarter revenue fell 17 percent to $8.3 billion, the company said. Return on equity, a measure of how effectively the firm reinvests earnings, dropped to 19.7 percent from 30.9 percent a year earlier. That compares with 15 percent at Goldman and 8.6 percent at Lehman.

``Their return-on-equity number was pretty surprising, especially after what we heard from Lehman and Goldman,'' Ciocca at Renaissance Financial said.

Fixed Income

Revenue at its fixed-income sales and trading group dropped 15 percent to $2.9 billion, still its second-highest ever, after total asset writedowns of $2.3 billion linked to the collapse of the subprime mortgage market and leveraged loans.

Investment-banking revenue, including a 19 percent increase in fees for takeover advice, fell 10 percent to $1.1 billion. Revenue at the global wealth-management unit increased 6 percent to $1.6 billion.

In asset management, the firm reported a pretax loss of $161 million for the quarter as the unit lost money in real-estate investments and securities issued by structured investment vehicles.

Morgan Stanley said it borrowed from the Fed's new lending facility for primary dealers, which allows firms that deal directly with the central bank to borrow funds at the so-called discount-window rate available to commercial banks.

``We have tested the window because we want to remove the stigma from the window,'' Chief Financial Officer Colm Kelleher said in an interview. ``It's meant to be there for normal business. It's not meant to be there as a last-recourse thing.''

Liquidity Reserve

Kelleher said the firm's parent company liquidity reserve is about $77 billion as of today, up from $71 billion at the end of the quarter and an average of $49 billion in 2007. The firm's adjusted leverage ratio, which measures how much Morgan Stanley relies on borrowed money, declined to 16 times from 17.6 times at the end of the prior quarter, he said.

``Strong capital, very high liquidity and the reduced leverage is allowing us to take advantage of near-term market opportunities and feel secure about these very choppy markets,'' Kelleher said in a telephone interview.

Goldman, the world's biggest securities firm by market value, yesterday reported its steepest profit decline since 1999 as it took $2 billion of writedowns on loans and mortgages, and as revenue from investment banking and trading declined. The 53 percent drop was less severe than analysts had estimated, and Chief Financial Officer David Viniar said the company's stockpile of cash and liquid assets was ``stronger than it's ever been.''

Lehman's Rally

Lehman gained 46 percent in NYSE trading yesterday after the company said profit fell a less-than-predicted 57 percent. The stock tumbled 19 percent a day earlier on concern it might follow in the footsteps of Bear Stearns. Chief Financial Officer Erin Callan told investors the firm hasn't lost access to so-called repo funding that Bear Stearns was denied by some counterparties, and has ``minimal reliance'' on commercial paper, a type of short-term financing that has dried up since the collapse of the mortgage-bond market.

Bear Stearns received emergency funding from the Fed on March 14 after a loss of confidence in the firm's assets led clients to withdraw assets and creditors to stop renewing short- term loans. Over the weekend, the Fed orchestrated and provided financing for a takeover by New York-based JPMorgan, the third- biggest U.S. bank by assets, for about $2.34 a share, compared with a closing price of $57 on March 13.

The Fed said March 16 it would allow brokers to borrow directly from the central bank using a facility traditionally reserved only for deposit-taking institutions.

`Better Suited'

``The system now in place is significantly better suited to serve the needs of today's financial markets, especially in periods of impaired liquidity and widespread counterparty risk aversion,'' Goldman analyst William Tanona said in a note to investors yesterday. He added Morgan Stanley to his ``conviction buy list'' and told clients the stock could reach $50 in six months.

Some of Morgan Stanley's trading businesses, including the prime brokerage unit that serves hedge funds, may win customers from Bear Stearns, said Kenneth Crawford, a senior portfolio manager at St. Louis-based Argent Capital Management LLC, which oversees $900 million and holds Morgan Stanley shares. Goldman said yesterday that revenue from prime brokerage climbed 38 percent from a year ago as the firm won business from new and existing clients.

``Any business that Bear Stearns had probably has gone to someone else,'' Crawford said. ``To the degree that you're one of three competitors instead of four, that's a positive.''

BLOOMBERG