Morgan Stanley’s (MS - Analyst Report) first-quarter 2013 adjusted earnings from continuing operations of 61 cents per share outpaced the Zacks Consensus Estimate by a nickel. However, this compared unfavorably with prior-year quarter earnings of 71 cents.
Better-than-expected results for Morgan Stanley were driven by a decline in operating expenses, partially offset by a fall in top line. Also, increase in net revenue across all segments was the tailwind. Further, improved asset position and stable capital ratios were the other highlights of the quarter.
Including the debt-related credit spreads and Debt Valuation Adjustment (DVA), Morgan Stanley reported net income of $1.0 billion or 49 cents per share. The company had recorded a loss of $79 million or 6 cents per share in the year-ago quarter.
Further, in the first quarter, Morgan Stanley ranked #2 in global announced M&A and #3 in global equity.
Behind the Headlines
Net revenue (excluding DVA adjustments) for the quarter was $8.5 billion, down 4.9% from the year-ago quarter. However, net revenue outpaced the Zacks Consensus Estimate of $8.3 billion. After taking into consideration the negative revenues pertaining to changes in Morgan Stanley’s debt-related credit spreads and DVA, net revenue grew 17.8% year over year to $8.2 billion.
Morgan Stanley recorded net interest income of $185 million in the reported quarter compared with a negative net interest income of $59 million in the year-ago quarter. The year-over-year improvement primarily stemmed from a decline in interest expenses.
Total non-interest revenues jumped 14.1% year over year to $8.0 billion. All the non-interest income components except commissions and fees grew from the prior-year quarter.
Total non-interest expenses were $6.5 billion, down 2.6% from the previous-year quarter. Morgan Stanley’s compensation to net revenue ratio for the reported quarter was 52% compared with 64% in the year-ago quarter.
Institutional Securities (IS) reported pre-tax income from continuing operations of $830 million compared with pre-tax loss of $329 million in the prior-year quarter. Net revenue was $4.1 billion, up 30.4% from $3.1 billion in the year-ago quarter. However, excluding DVA, net revenue stood at $4.4 billion, falling 13.9% on a year-over-year basis.
Global Wealth Management (GWM) pre-tax income from continuing operations was $597 million, increasing 48.1% from $403 million in the year-ago quarter. Net revenue was $3.5 billion, improving 5.4% from $3.2 billion in the year-ago quarter, reflecting higher asset management fees.
Asset Management (AM) pre-tax income from continuing operations was $187 million, up 46.1% year over year. Net revenue for the reported quarter was $645 million, up 21.0% from $533 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 Mar 31, 2013, total assets under management were $341 billion, up 12.2% from $304 billion as of Mar 31, 2012. The surge primarily reflected positive net customer flows and market appreciation.
As of Mar 31, 2013, book value per share was $31.22, up from $30.74 as of Mar 31, 2012. Tangible book value per share was $27.39, up from $27.37 as of Mar 31, 2012.
Morgan Stanley’s Tier 1 capital ratio, under Basel I, was 13.9% and Tier 1 common ratio was 11.5% compared with 16.9% and 13.3%, respectively in the year-ago quarter.
Concurrent with the earnings release, Morgan Stanley declared a quarterly dividend of 5 cents per share. The dividend will be paid on May 15 to shareholders of record as of Apr 30.
Performance of Other Major Banks
Among other Wall Street giants, JPMorgan Chase & Co. (JPM - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report) have reported better-than-expected first quarter results and upheld the banking image. While the results for JPMorgan were primarily aided by solid expense management, Goldman’s results largely benefited from an improved top line.
However, Bank of America Corporation (BAC - Analyst Report) marginally lagged the Zacks Consensus Estimate. Though results benefited from a rise in revenues, substantial slowdown in the provision for credit losses and a drop in operating expenses, lower mortgage banking income and reduced net gains on the sales of debt securities somewhat faded the shine of its bottom line.
We expect Morgan Stanley’s initiatives to offload its non-core assets to reduce balance sheet risk and shift focus on the less capital incentive AM and GWM segments. Moreover, additional stake buy in Morgan Stanley Wealth Management (MSWM) JV will diversify its revenue base and stabilize the company’s earnings going forward.
In Mar 2013, Morgan Stanley received approval from the Federal Reserve to go ahead with its plan to acquire the remaining 35% stake in MSWM. Further, the approval of its latest capital plan reinforces the belief that the company’s capital position remains stable. Moreover, there are high chances of enhanced dividend payments and resumption of share buyback activity once the stake buyout is complete, provided it receives the Fed’s consent for the same.
Moreover, 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 footprint in economies, which are less impacted by the financial crisis and the European debt crisis.
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 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.
Morgan Stanley currently retains a Zacks Rank #3 (Hold).