Sweet Home, Morgan Stanley
Mark DeCambre
03/21/07 - 01:28 PM EDT
The hobbled residential lending business helped rather than hurt
Morgan Stanley's (MS Quote) blowout first quarter, the Wall Street firm's chief financial officer says.
Subprime lending falls within the New York-based global financial institution's fixed-income business, and to look at Morgan's first-quarter results, you'd never know the industry had a problem. Fixed-income sales and trading revenue rose 31% from a year ago to $3.6 billion, as credit products revenue soared 94%.
Shares rose 5% in heavy trading Wednesday afternoon.
The "largest driver was in credit markets, and residential was a big part of that driver," CFO David Sidwell said on a morning conference call. He added that Morgan's hedging strategies and its lending platform in subprime shone through in its strong results.
"In the aggregate, [subprime lending] was significant to our results," Sidwell said, though he declined to say specifically how much of an impact subprime had on earnings or how much subprime paper Morgan owns.
Morgan has some $2.5 billion in loans out to
New Century (NEWC Quote), the subprime lender whose credit was cut off by lenders earlier this month, he noted.
The market has been watching closely to see how much of an impact subprime lending has had on financial institutions such as
Goldman Sachs (GS Quote),
Lehman Brothers (LEH Quote) and
Bear Stearns (BSC Quote), because these firms have been big lenders to mortgage companies or hold stakes in subprime lending operations.
Morgan Stanley, for one, owns Saxon Capital. It acquired the business back in August for some $706 million to bolster its growing mortgage lending operation. The move was done in part to stay competitive in a market in which many other commercial and investment banks were beefing up their own mortgage practices.
During the earnings call, Sidwell said the Saxon purchase increases Morgan's mortgage footprint and allows it to have "a fuller, more vertically integrated mortgage business," he said. In short, the firm will be on the prowl for opportunities in subprime.
Sidwell notes that Saxon, given the lending institution's subprime servicing capability, could give Morgan an advantage.
Overall, Morgan's results were stellar, with continuing operations earnings soaring to $2.56 billion, or $2.40 a share, from the year-ago $1.6 billion, or $1.51 a share. Revenue jumped to $11 billion from $8.55 billion a year earlier. Analysts surveyed by Thomson Financial were looking for a profit of $1.88 a share on revenue of $9.42 billion.
Other areas of strength included institutional securities revenue, which surged 37% from a year ago to $7.6 billion, while pretax income rose 71% to a record $3 billion and return on average common equity was 40%.
Equity sales and trading revenue leaped 36% from a year ago to $2.2 billion, reflecting record revenue in derivatives and in prime brokerage, two key areas that the company has invested in as part of its growth plans.
A big plus for the Morgan was its global wealth management group, which delivered a pretax margin of 15% and its highest quarterly revenue since 2000, as financial adviser productivity and client assets per global representative reached all-time highs and client assets in the bank deposit sweep program exceeded $16 billion.
Shares rose $3.71 to $79.82.
