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Morgan Stanley (MS - Analyst Report) recently completed the divestiture of its European real estate debt servicing arm worth £4.5 billion ($7.4 billion). The servicing unit was acquired by Mount Street, a U.K based firm that provides loan services as well as other loan management solutions to the European commercial real estate (CRE) sector.

As per a report in CoStar Finance, the vended unit includes nine commercial mortgage backed security (CMBS) transactions worth £2.74 billion ($4.5 billion).

Following the boom in the European CMBS market in the pre-crisis period, Morgan Stanley had initiated a European Loan Conduit (ELoC) program. The vended servicing units were set up at that time to service the loans related to the ELoC program.

However, with the changing economic scenario in Europe, Morgan Stanley’s mortgage business soon fell into trouble. Despite the condition stabilizing of late, the overall prospect of mortgage business still seems gloomy.

Moreover, in fourth-quarter 2013, Morgan Stanley’s earnings from continuing operations fell 79% year over year to 7 cents per share. The disappointing results were due to the legal reserve of $1.2 billion kept aside in that quarter for resolving mortgage-related matters.

Therefore, the aforementioned divestiture by Morgan Stanley is in line with the company’s strategy to avoid legal hassles related to mortgage servicing going forward. Further, offloading its non-core assets will continue to strengthen its balance sheet.

Moreover, the company is now shifting its focus to increasingly profitable Wealth Management (WM) and Investment Management (IM) segments. In fourth-quarter 2013, while WM recorded a 26% rise in pre-tax income from continuing operations, IM reported a 52% rise.

Divestiture of mortgage servicing units is not new for Morgan Stanley. Earlier, in Apr 2012, Morgan Stanley sold its mortgage-servicing unit Saxon Mortgage Services Inc. to Ocwen Financial Corp. (OCN - Analyst Report) for $73.8 million in cash.

Currently, Morgan Stanley carries a Zacks Rank #3 (hold). Some better-ranked major financial institutions include Bank of America Corp. (BAC - Analyst Report) and The Goldman Sachs Group, Inc. (GS - Analyst Report). Both of these companies carry a Zacks Rank #2 (Buy).

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