Updated from 4:48 p.m. EDT
CFO Colm Kelleher said Tuesday that the firm has moved past its subprime exposures and is ready to take advantage of asset prices that have reached "silly and irrational levels."
Morgan far exceeded expectations in an early announcement of third-quarter results on Wednesday, although tough market conditions caused profits to drop 8%.
The investment bank reported earnings of $1.43 billion, or $1.32 per share, down from $1.54 billion, or $1.44 per share, a year earlier. Revenue climbed 1% to $8 billion in the quarter ended Aug. 31.
Analysts had expected Morgan to report earnings of 78 cents per share on revenue of $6.32 billion, on average, according to Thomson Reuters. Following the announcement after the closing bell, shares of the New York-based brokerage reversed the day's 10.5% decline to $28.78, but more recently were up 2.4% to $29.40 in after-hours trading.
Kelleher said that Morgan issued the unexpected earnings report to highlight the "strength and robustness" of the firm and dispel market rumors. Speculation abounds about the fate of Morgan Stanley and its competitor,
, the only two major U.S. brokerage houses that remain independent as competitors like
were either acquired on the cheap or went into bankruptcy amid the housing and credit-market crises.
Although results have not improved on a year-to-year basis, the fact that
has remained in the black -- and remained independent -- shows relative strength in a challenging environment. Investment banks are facing high credit costs, declining values for equities and commodities and clients fleeing the volatile markets.
Morgan Stanley said Tuesday that its net exposure to subprime real-estate assets have dropped down to zero, as it made efforts to further reduce its exposure to risky assets. Strong results in Morgan's prime brokerage last quarter, as well as wider credit spreads in fixed-income, offset declines in its wealth management and asset management divisions. The company also stands to benefit from sapping business and talent from the collapse or mergers of competing firms, as well as distressed prices on equities, debt and commodities, Kelleher said.
"On a risk-adjusted basis, we feel we have the ammunition and firepower to take advantage of these prices," Kelleher said, "which in some cases have gotten to silly and irrational levels."
The firm has already sold off a large portion of its distressed assets, posting billions of dollars worth of writedowns over the past year. Still, the broader investment banking business is sure to suffer with high credit costs, declining values for equities and commodities and clients fleeing the volatile markets.
Morgan also began to put the auction-rate securities debacle behind it, posting $277 million in charges related to its ARS settlement. Morgan Stanley has committed to buy back $4.5 billion worth of clients' illiquid ARS altogether. Several other financial institutions agreed to similar deals as regulators began investigating the firms' marketing practices of ARS assets.
Even as Morgan Stanley beats expectations, its stock may face continued pressure. The other independent firm on Wall Street, Goldman Sachs, beat expectations by 8 cents per share, but its report of a 70% drop in fiscal third-quarter earnings on Tuesday failed to impress investors. Its shares dropped $2.49, or 1.8% to close the session at $133.01.
Financial stocks have also suffered because of speculative
and investors who have become skittish about firms' viability, regardless of their relative strength. Citi Investment Research analyst Prashant Bhatia downgraded Morgan Stanley to hold this week, despite a positive outlook on its earnings power and revenue streams.
"Brokers are not trading on fundamentals in the near-term due to turmoil in the marketplace," Bhatia says.