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Morgan Stanley Reports Full Year And Fourth Quarter 2011:

Stocks in this article: MS

Morgan Stanley (NYSE: MS) today reported income of $4.2 billion, or $1.26 per diluted share, 1 from continuing operations applicable to Morgan Stanley for the year ended December 31, 2011 compared with income of $4.5 billion, or $2.45 per diluted share, a year ago. Net revenues were $32.4 billion for the year compared with $31.4 billion a year ago. Results for the year included positive revenue of $3.7 billion, or $1.34 per diluted share, compared with negative revenue of $873 million a year ago related to changes in Morgan Stanley’s debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA). 2 The Firm executed several key strategic actions in 2011 which affected earnings including: the conversion of the Firm’s Series B Preferred Stock held by Mitsubishi UFJ Financial Group, Inc. (MUFG) into common stock which resulted in a negative adjustment to earnings per share of approximately $1.7 billion, the previously announced settlement with MBIA (MBIA) which resulted in a pre-tax loss of approximately $1.7 billion and the restructuring of the sale of Revel Entertainment Group, LLC (Revel) which resulted in a net tax benefit of $447 million. In addition, results for the current year also included a pre-tax loss of approximately $783 million arising from the Firm’s 40% stake in a Japanese securities joint venture (Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. or MUMSS) controlled and managed by our partner, MUFG. 3

The Firm’s compensation expense for the current year was $16.4 billion with a compensation to net revenue ratio of 51%. Non-compensation expenses of $9.9 billion increased 7% from the prior year.

The loss from continuing operations applicable to Morgan Stanley for the current quarter was $227 million, or $0.14 per diluted share, 1 and included the loss related to MBIA of $1.7 billion or $0.59 per diluted share, compared with income of $871 million, or $0.44 per diluted share, for the same period a year ago. Current quarter net revenues were $5.7 billion, inclusive of the $1.7 billion loss related to MBIA, compared with $7.7 billion a year ago. Results for the current quarter also included positive revenue of $216 million, or $0.06 per diluted share, compared with negative revenue of $945 million a year ago related to DVA. 2

The Firm’s compensation expense for the current quarter was $3.8 billion compared with $4.0 billion a year ago. The Firm’s current quarter compensation to net revenue ratio of 67% was adversely affected by MBIA, which decreased net revenues in the current period. Excluding MBIA, this ratio would have been 51%. 4 Non-compensation expenses of $2.4 billion for the current quarter decreased from $2.5 billion a year ago.

For the current year, net income applicable to Morgan Stanley, including discontinued operations, was $1.23 per diluted share, compared with net income of $2.63 per diluted share in 2010. For the current quarter, the net loss applicable to Morgan Stanley, including discontinued operations, was $0.15 per diluted share, compared with net income of $0.41 per diluted share in the fourth quarter of 2010. 5

Full Year Business Highlights

  • Investment Banking revenues were $4.2 billion. The Firm ranked #1 in global completed M&A and #2 in global IPOs, global Equity and global announced M&A 6 – advising on eight of the top ten completed M&A transactions for 2011.
  • Equity sales and trading net revenues of $6.8 billion included positive revenue of $619 million related to DVA and reflected broad-based market share gains. 2
  • Fixed Income and Commodities sales and trading net revenues of $7.5 billion, including positive revenue of $3.1 billion related to DVA 2 and the negative impact of MBIA, reflected strong results in interest rate products.
  • Global Wealth Management Group delivered net revenues of $13.4 billion, with global fee based asset flows of $42.5 billion and net new assets of $35.8 billion, the highest for both since the inception of the Morgan Stanley Smith Barney joint venture (MSSB). The year’s pre-tax margin improved to 10% from 9% a year ago. 7
  • Asset Management reported net revenues of $1.9 billion, with assets under management or supervision of $287 billion and positive net flows of $25.8 billion.

James P. Gorman, Chairman and Chief Executive Officer, said, "For the past year, Morgan Stanley has made enormous progress by addressing a number of outstanding strategic and legacy issues. These included the conversion of MUFG’s preferred investment into common stock and the settlement with MBIA. Importantly, we also achieved market share gains across our institutional businesses, as well as significant net flows into our Global Wealth Management and Asset Management platforms. We ended the year in better shape than where we started and we are well positioned to deliver improved returns to shareholders in 2012 and beyond."

 
Summary of Business Segment Results
(dollars in millions)
      Institutional Securities       Global Wealth Management Group       Asset Management
Net       Pre-Tax Net       Pre-Tax Net       Pre-Tax
Revenues (1)       Income Revenues       Income Revenues       Income
FY 2011 $17,208 $4,585 $13,423 $1,276 $1,887 $253
FY 2010 $16,169 $4,372 $12,636 $1,156 $2,685 $718
 
4Q 2011 $2,071 ($779) $3,250 $244 $424 $78
3Q 2011 $6,411 $3,447 $3,260 $362 $205 ($118)
4Q 2010       $3,566       $448       $3,353       $390       $846       $353

(1) Net revenues for FY 2011, FY 2010, 4Q 2011, 3Q 2011 and 4Q 2010 include positive (negative) revenue from DVA of $3.7 billion, ($873) million, $216 million, $3.4 billion and ($945) million, respectively.

INSTITUTIONAL SECURITIES

FULL YEAR

Institutional Securities reported pre-tax income from continuing operations of $4.6 billion compared with $4.4 billion in 2010. Net revenues for the current year were $17.2 billion, inclusive of MBIA, compared with $16.2 billion a year ago. DVA resulted in positive revenue of $3.7 billion in the current year compared with negative revenue of $873 million a year ago. 2 The year’s pre-tax margin was 27%. 7 Due to the impact of DVA in the comparative periods, the following discussion for sales and trading focuses on current year results.

  • Advisory revenues of $1.7 billion increased 18% from a year ago reflecting higher levels of completed activity.
  • Underwriting revenues of $2.5 billion declined 12% from last year on lower levels of market activity. Equity underwriting revenues of $1.1 billion declined 22% from a year ago. Fixed income underwriting revenues of $1.4 billion were essentially unchanged from a year ago.
  • Fixed Income and Commodities sales and trading net revenues of $7.5 billion included MBIA and positive revenue of $3.1 billion related to DVA. 2 Results for the current year primarily reflected high levels of market volatility and client activity in interest rate and currency products partly offset by the impact of a stressed credit environment.
  • Equity sales and trading net revenues of $6.8 billion included positive revenue of $619 million related to DVA 2 and reflected particular strength in derivatives and our electronic trading platform.
  • Other sales and trading net losses of $1.3 billion primarily reflected losses associated with corporate lending activity and funding costs related to liquidity held by the Firm’s U.S. subsidiary banks.
  • Compensation expense for the current year was $7.2 billion with compensation to net revenue ratio of 42%. Non-compensation expenses of $5.4 billion increased from $4.8 billion a year ago primarily reflecting higher levels of business activity and the initial costs associated with the Chinese securities joint venture with Huaxin Securities Co. Ltd.

FOURTH QUARTER

Institutional Securities reported a pre-tax loss from continuing operations of $779 million compared with pre-tax income of $448 million in the fourth quarter of last year. Net revenues for the current quarter were $2.1 billion, inclusive of MBIA, compared with $3.6 billion a year ago. DVA resulted in positive revenue of $216 million in the current quarter compared with negative revenue of $945 million a year ago. 2 Due to the impact of DVA in the comparative periods, the following discussion for sales and trading focuses on current period results.

  • Advisory revenues of $406 million decreased 16% from a year ago reflecting lower levels of completed market activity.
  • Underwriting revenues of $477 million declined 54% from last year’s fourth quarter. Equity underwriting revenues of $189 million declined 71% from a year ago on lower market volume. Fixed income underwriting revenues of $288 million declined 22% from last year’s fourth quarter primarily reflecting lower high yield bond issuance volume.
  • Fixed Income and Commodities sales and trading net losses of $257 million included the loss related to MBIA. Net revenues for the quarter also reflected strong results in interest rate and currency products, approximately $600 million related to the release of credit valuation adjustments upon the restructuring of certain derivative transactions representing exposure to the European Peripherals and the positive impact of $239 million related to DVA. 2, 8
  • Equity sales and trading net revenues of $1.3 billion 2 reflected prudent risk management in a challenging market.
  • Other sales and trading net revenues of $83 million primarily reflected gains on hedges to the Firm’s long-term debt partly offset by funding costs related to liquidity held by the Firm’s U.S. subsidiary banks.
  • Compensation expense for the current quarter was $1.6 billion with a compensation to net revenue ratio of 75%. This ratio was adversely affected by MBIA, which reduced net revenues in the current period. Excluding MBIA, this ratio would have been 41%. 4 Non-compensation expenses of $1.3 billion decreased 4% from a year ago.
  • Morgan Stanley’s average trading Value-at-Risk measured at the 95% confidence level was $123 million compared with $130 million in the third quarter of 2011 and $132 million in the fourth quarter of the prior year.

GLOBAL WEALTH MANAGEMENT GROUP

FULL YEAR

Global Wealth Management Group reported pre-tax income from continuing operations of $1.3 billion compared with $1.2 billion a year ago. The year’s pre-tax margin was 10%. 7 Income after the noncontrolling interest allocation to Citigroup Inc. and before taxes was $1.1 billion. 9

  • Net revenues of $13.4 billion increased from $12.6 billion a year ago primarily reflecting higher asset management and net interest revenues, partly offset by lower principal trading and investment banking revenues.
  • The compensation to net revenue ratio for the current year was 62% with compensation expense of $8.4 billion. Non-compensation expenses were $3.8 billion compared with $3.6 billion a year ago.
  • Total client assets were $1.6 trillion at year end. Client assets in fee-based accounts were $496 billion and represented 30% of total client assets. Global fee based asset flows increased 30% from a year ago to $42.5 billion and net new assets increased 56% from a year ago to $35.8 billion.
  • The 17,156 global representatives 10 at year end achieved average annualized revenue per global representative of $763,000 and total client assets per global representative of $96 million.

FOURTH QUARTER

Global Wealth Management Group reported pre-tax income from continuing operations of $244 million compared with $390 million in the fourth quarter of last year. The quarter’s pre-tax margin was 8%. 7 Income after the noncontrolling interest allocation to Citigroup Inc. and before taxes was $228 million. 9

  • Net revenues of $3.3 billion decreased from $3.4 billion in last year’s fourth quarter. The decrease in net revenues primarily reflected lower commissions and investment banking revenues, partly offset by higher net interest revenues.
  • The compensation to net revenue ratio for the current quarter was 64% with compensation expense of $2.1 billion. Non-compensation expenses were $932 million compared with $968 million a year ago.
  • For the current quarter, global fee based asset flows were $4.9 billion and net new assets were $6.0 billion.

ASSET MANAGEMENT

FULL YEAR

Asset Management reported pre-tax income from continuing operations of $253 million compared with pre-tax income from continuing operations of $718 million a year ago. 11 The year’s pre-tax margin was 13%. 7 Income after the noncontrolling interest allocation and before taxes was $108 million.

  • Net revenues of $1.9 billion decreased from $2.7 billion a year ago as higher results in the Traditional Asset Management business were significantly offset by lower gains on principal investments in the Merchant Banking and Real Estate Investing businesses. 12
  • The compensation to net revenue ratio for the current year was 45% with compensation expense of $848 million. Non-compensation expenses of $786 million decreased from $859 million a year ago.
  • Assets under management or supervision at December 31, 2011 of $287 billion increased from $272 billion a year ago. The business recorded positive net flows of $25.8 billion in the current year compared with net outflows of $5.7 billion a year ago. The increase in flows for the current year reflected the initial sweep of MSSB client cash balances of approximately $18.5 billion into liquidity funds and inflows of $7.9 billion into alternatives funds, partly offset by outflows of $5.5 billion in fixed income products.

FOURTH QUARTER

Asset Management reported a pre-tax income from continuing operations of $78 million compared with pre-tax income from continuing operations of $353 million in last year’s fourth quarter. 11 The quarter’s pre-tax margin was 18%. 7 Income after the noncontrolling interest allocation and before taxes was $34 million.

  • Net revenues of $424 million decreased from $846 million a year ago primarily reflecting lower gains on principal investments in the Merchant Banking and Real Estate Investing businesses. 12
  • The compensation to net revenue ratio for the current quarter was 43% with compensation expense of $183 million. Non-compensation expenses of $163 million decreased from $216 million a year ago.
  • The business recorded positive net flows of $14.5 billion in the current quarter compared with net outflows of $0.6 billion in the fourth quarter of last year. The current quarter included inflows of $7.8 billion into alternatives funds and $6.7 billion into liquidity funds.

CAPITAL

Morgan Stanley’s Tier 1 capital ratio, under Basel I, was approximately 16.6% and Tier 1 common ratio was approximately 13.0% at December 31, 2011, 13 reflecting the Federal Reserve Board’s formalized regulatory definitions for Tier 1 common capital and the Tier 1 common ratio. 14 The return on average common equity from continuing operations for the full year was 3.9%.

At December 31, 2011, book value and tangible book value per common share were $31.42 and $27.95, 15 respectively, based on approximately 1.9 billion shares outstanding.

OTHER MATTERS

Excluding discrete tax gains, the effective tax rate from continuing operations for the full year was 31.5% compared with 28.1% in the prior year. 16 The increase in the rate primarily reflected the change in the geographic mix of earnings.

The Firm declared a $0.05 quarterly dividend per common share. The dividend is payable on February 15, 2012 to common shareholders of record on January 31, 2012.

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