Morgan Posts Sharp Earnings Decline, Sees Little Pickup
For brokers,
the song remains the same as lackluster second-quarter earnings roll in. Now investors are worrying they may be humming the same tune right through the third quarter.
Morgan Stanley Dean Witter
(MWD)
Thursday became the latest firm to report a sharp year-over-year decline in profits. Like so many of its counterparts, the broker is struggling with weak capital markets and a dearth of underwriting and mergers-and-acquisition deals. Worse still, Morgan Stanley offered little encouragement about the next quarter. Still, its shares jumped 7% as investors wagered that falling interest rates will fuel a rally in financial stocks.
Morgan posted second-quarter earnings of $930 million, or 82 cents a share, better than the
Thomson Financial/First Call
estimate of 79 cents but down sharply from the year-ago $1.46 billion, or $1.26 a share. Net revenue fell a more modest 15%, compared with the 36% drop in profits.
Mark Constant, an analyst with
Lehman Brothers
in San Francisco, is concerned with Morgan's deal pipeline going into the third quarter, which he says "does not appear to be particularly strong." There was talk on Morgan Stanley's conference call to the effect that the firm needs to start getting some deals announced, but "the timing was difficult to read," says Constant. "I'm expecting the third quarter to be somewhat weak. It's a safe expectation it will look more like the second quarter than the third quarter a year ago." Constant rates Morgan buy.
Morgan, which owns the Discover credit card, also sounded a cautious tone on credit quality. In the latest quarter, a 19% drop in credit services net income reflected higher net charge-offs and noninterest expense. The credit-card net charge-off rate jumped 77 basis points from a year ago, to 4.98%.
The firm also said accounts with bankruptcy notifications "trended significantly higher during the quarter." Given that write-offs follow notifications by 60 days, the spike is sure to have negative implications for credit quality in the third quarter.
Aside from the cautious outlook, Constant says the upside on the consensus was primarily a result of securities revenue, which did not decline as much as anticipated. Bond trading was the one saving grace for many brokers this quarter, as lower interest rates and weak equity markets fueled robust volume, particularly in mortgage-backed trading.
Though Morgan did report a record quarter for fixed income, largely due to strength in government and investment-grade debt, its mortgage-backed business is much smaller than at firms such as Lehman Brothers
(LEH)
and
Bear Stearns
(BSC)
, where mortgage-backed trading has helped cushion the blow from other weak investment-banking business lines.
Whereas Bear
Wednesday said fixed-income revenue alone was $514.3 million, Morgan's entire securities business, including fixed income and equity lines, reported revenue of $635 million, down 42% from the year-ago level. On a call with investors, Morgan Stanley said total revenue in mortgage-backed was only in the "tens of millions" of dollars.
Morgan Stanley was getting a lift despite the report, lately up $4.11, or 6.9%, to $63.46. Lehman Brothers was up $1.10, or 1.5%, to $77.05 and Bear Stearns was up $1.96, or 3.6%, to $57.09. The
American Stock Exchange Broker/Dealer Index
was up 1.8%.