Morgan Stanley Profit Declines As Trading Revenue Weakens

Morgan Stanley’s headquarters in New York ENLARGE
Morgan Stanley’s headquarters in New York Photo: Stan Honda/Agence France-Presse/Getty Images

Morgan Stanley MS 1.01 % said its third-quarter profit fell 40% as the company managed through choppy markets that depressed trading activity.

Shares slid 6% premarket as earnings and revenue badly missed analysts’ estimates.

The New York-based bank reported a profit of $ 1.02 billion, or 48 cents a share. That compares with the $ 1.69 billion, or 83 cents a share, it reported in the same period of 2014.

Excluding debt-valuation adjustments and legal reserves, earnings were 42 cents a share. Analysts polled by Thomson Reuters had expected earnings of 62 cents a share.

Revenue fell 13% to $ 7.77 billion. Excluding accounting adjustments, revenue declined to $ 7.33 billion, missing the $ 8.54 billion analysts had expected.

Trading revenue was $ 2.35 billion in the quarter, down 15% from $ 2.78 billion in the same period a year ago. At rival Goldman Sachs Group Inc., trading revenue also declined 15%.

Revenue from investment banking totaled $ 1.18 billion in the third quarter, a 12% decrease from $ 1.34 billion in the third quarter of 2014. Fees from advising on deals were up 42% to $ 557 million, while fees from underwriting equity and debt fell 34% to $ 624 million.

Profit in Morgan Stanley’s wealth-management arm was $ 509 million, up 6% from $ 479 million last year.

Morgan Stanley’s firm-wide expenses fell 6% to $ 6.29 billion from $ 6.69 billion in the third quarter last year. Compensation and benefits expense were $ 3.44 billion, down 18% from $ 4.21 billion a year ago.

Return on equity, a commonly used measure of bank profitability, fell to 3.9% from 8.9% in the third quarter a year ago excluding an accounting adjustment. With the adjustment, the return was 5.6%. Morgan Stanley executives have pledged to lift return on equity above 10%.

Under Chairman and Chief Executive James Gorman, Morgan Stanley has made strides to diversify away from risky businesses such as trading physical commodities and focus on safer ventures such as managing clients’ wealth. But 40% of the bank’s revenue was still tied to trading securities in the first half of the year, meaning it wasn’t immune from the volatile market moves of the past few months.

In a statement, Mr. Gorman noted the firm benefited from its wealth management business and continued strength in investment banking “as we navigate these challenging markets and focus intensely on addressing areas of underperformance.”

Non-compensation costs rose to $ 2.9 billion from $ 2.5 billion, reflecting an increase in litigation reserves of about $ 250 million. Part of that was driven by an increase in the reserve related to the settlement of an “antitrust litigation matter” tied to credit default swaps, the company said. Credit derivatives are insurance-like contracts that compensate users for corporate debt defaults.

Shares of Morgan Stanley have fallen 13% since the start of 2015 compared with a 4.4% decrease in the KBW index of bank stocks over the same period.

Write to Peter Rudegeair at [email protected] Markets

About The Author