Morgan Stanley’s (MS - Analyst Report) fourth quarter 2012 earnings from continuing operations came in at 28 cents per share, marginally ahead of the Zacks Consensus Estimate of 26 cents. Moreover, the results are significantly better than the prior-year quarter’s loss of 13 cents.
In 2012, Morgan Stanley reported a loss from continuing operations of 3 cents per share, narrower than the Zacks Consensus Estimate of a loss of 6 cents. However, in 2011, the company had reported earnings of $1.26.
Better-than-expected quarterly results for Morgan Stanley were attributable to top-line growth, partially offset by still high operating expenses. Further, increase in net revenue across all segments was the tailwind for the company.
Excluding the debt-related credit spreads and Debt Valuation Adjustment (DVA), Morgan Stanley reported net income of $894 million or 45 cents per share from continuing operations. The company had recorded a loss of $349 million or 20 cents per share from continuing operations in the year-ago quarter.
Further, in the fourth quarter, Morgan Stanley ranked #1 in global IPOs, while it ranked #2 in global announced M&A and global equity.
Behind the Headlines
Net revenues (excluding DVA adjustments) for the quarter were $7.5 billion, surging 40% from the year-ago quarter. Net revenues also significantly outpaced the Zacks Consensus Estimate of $7.3 billion. After taking into consideration the negative revenue pertaining to changes in Morgan Stanley’s debt-related credit spreads and DVA, net revenues grew 22.7% year over year to $7.0 billion.
In 2012, net revenues (excluding DVA adjustments) were $30.5 billion, increasing 6.9% from the year-ago quarter. Net revenues were also ahead of the Zacks Consensus Estimate of $29.9 billion. However, after taking into consideration the negative revenue pertaining to changes in Morgan Stanley’s debt-related credit spreads and DVA, net revenues declined 19.0% year over year to $26.1 billion.
Morgan Stanley recorded a net interest income of $175 million in the reported quarter, down 35% year over year. The fall was primarily a result of rise in interest income that was more-than-offset by higher interest expenses.
Total non-interest revenues jumped 26% year over year to $6.8 billion. All the non-interest income components, other than commissions and fees, rose from the prior-year quarter.
Total non-interest expenses were $6.1 billion, almost at par with the previous-year quarter level. Morgan Stanley’s compensation to net revenue ratio for the reported quarter was 52%, compared with 67% in the year-ago quarter.
Institutional Securities (IS) reported pre-tax income from continuing operations of $57 million compared with pre-tax loss of $772 million in the prior-year quarter. Net revenues were $3.0 billion, up 42.7% from $2.1 billion in the year-ago quarter. However, excluding DVA, net revenue stood at $3.5 billion, rising 86.9% on a year-over-year basis.
Global Wealth Management (GWM) pre-tax income from continuing operations was $581 million, increasing significantly from $238 million in the year-ago quarter. Net revenue was $3.5 billion, improving 7.5% from $3.2 billion in the year-ago quarter, reflecting marginally higher asset management fees.
Asset Management (AM) pre-tax income from continuing operations was $221 million, up substantially from $78 million in the year-ago quarter. Net revenue for the reported quarter was $599 million, up 41.3% from $424 million in the year-ago quarter. The rise was driven by robust results in the Traditional Asset Management business along with gains on principal investments in the Merchant Banking and Real Estate Investing businesses.
As of Dec 31, 2012, total assets under management were $338 billion, up 17.8% from $287 billion as of Dec 31, 2011. The surge primarily reflected positive net customer flows in liquidity funds and market appreciation.
As of Dec 31, 2012, book value per share was $30.65, down from $31.42 as of Dec 31, 2011. Tangible book value per share was $26.81, down from $27.95 as of Dec 31, 2011.
Morgan Stanley’s Tier 1 capital ratio, under Basel I, was approximately 17.9% and Tier 1 common ratio was approximately 14.7%.
Concurrent with the earnings release, Morgan Stanley declared a quarterly dividend of 5 cents per share. The dividend will be paid on Feb 15 to shareholders of record on Feb 5.
Performance by Peers
Among other Wall Street giants – JPMorgan Chase & Co. (JPM - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report) – reported robust fourth quarter results, while for Bank of America Corporation (BAC - Analyst Report) the beat was by a penny.
However, Citigroup Inc. (C - Analyst Report) reported disappointing fourth quarter 2012 results with earnings per share significantly below the Zacks Consensus Estimate. The quarterly results were impacted by credit valuation adjustment (CVA) and debt valuation adjustment (DVA) as well as repositioning charges.
We expect Morgan Stanley’s initiatives to offload its non-core assets will help reduce balance sheet risk and shift focus on less capital incentive AM and GWM segments. Moreover, additional stake buy in the Morgan Stanley Smith Barney JV will diversify its revenue base and stabilize the company’s earnings forward.
Morgan Stanley’s organic and inorganic growth initiatives continue to be the significant growth drivers. The company remains focused on diversifying its revenue base by expanding its footprints in economies which are less impacted by the financial crisis and the European debt crisis.
Earlier this month, Morgan Stanley announced its plan to retrench nearly 1,700 workers as well as reduce and re-size IS segment’s geographic footprint. The market instability and weakening revenue sources prompted the company to take this decision for reducing costs.
Yet, there are concerns related to Morgan Stanley’s financials being marred by new regulatory requirements and intense pricing competition. Also, stringent capital norms may somewhat lower the flexibility of the company with respect to its investments and lending volumes.
An investor with an appetite to absorb risks related to the market volatility should not be disappointed with investments in Morgan Stanley over the long term. The company’s fundamentals remain highly promising with a diverse business model and a stable balance sheet and capital position. Also, we believe that Morgan Stanley will be able to clear the upcoming round of stress tests. Hence, there remains a chance of meaningful capital deployment going forward.
Morgan Stanley currently retains a Zacks Rank #3 (Hold). Also, we maintain a long-term Neutral recommendation on the stock.