Morgan Stanley's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Morgan Stanley (MS)

Q1 2012 Earnings Call

April 19, 2012 10:00 am ET

Executives

Celeste Brown - Managing Director

James P. Gorman - Chairman, Chief Executive Officer, President, Member of Operating Committee and Chairman of Morgan Stanley Smith Barne

Ruth Porat - Chief Financial Officer, Executive Vice President and Member of Operating Committee

Analysts

Howard Chen - Crédit Suisse AG, Research Division

Guy Moszkowski - BofA Merrill Lynch, Research Division

Michael Carrier - Deutsche Bank AG, Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Roger A. Freeman - Barclays Capital, Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Presentation

Celeste Brown

Good morning. This is Celeste Brown, Head of Investor Relations at Morgan Stanley. Welcome to our first quarter earnings call. Today's presentation may include forward-looking statements which reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results to differ materially. The presentation may also include certain non-GAAP financial measures. Please see our SEC filings at www.morganstanley.com for a reconciliation on such non-GAAP measures to the comparable GAAP figures and for a discussion of additional risks and uncertainties that may affect the future results of Morgan Stanley. This presentation, which is copyrighted by Morgan Stanley and may not be duplicated or reproduced without our consent, is not an offer to buy or sell any security or instrument. I will now turn the call over to Chairman and Chief Executive Officer, James Gorman.

James P. Gorman

Thank you, Celeste. Good morning, everyone. I'm pleased to be here with Ruth to discuss our first quarter results today. There were several significant highlights in the quarter, but it's important to remind you of some of the steps we've taken to reach this point. For the past 2 years, our team has systematically executed in a number of areas including selling certain assets and eliminating legacy positions to move beyond the crisis; rebuilding and investing in the client footprint in Institutional Securities, implementing the MSSB integration; increasing fee-based assets and improving the profit margin in that business; deepening and strengthening our partnership with MUFG; building and maintaining a conservative capital, liquidity and leverage profile; and finally and not unimportantly, maintaining strong expense discipline. While this has been a long and at times, arduous journey, our results this quarter are evidence we're on the right track. Ruth will take you through the GAAP results in detail, but let me underscore a few things.

x DVA, our revenue, net earnings, EPS and ROE for the quarter were among the highest since the financial crisis. ROE was over 9%. IC revenues were particularly strong with significant progress in Fixed Income, driven by improved balance sheet velocity and VAR efficiency. This was coupled with continued strength in equities despite challenging markets. We reached an important milestone in the quarter with the successful move for the first wave of legacy Smith Barney Advisors to our new technology platform, with the rest to follow in early May and early July. We are just 11 weeks away from completion of this integration.

Our strategic partnership with MUFG continues to grow as we deepen client relationships and leverage our combined balance sheet to deliver financial solutions. Finally, we have delivered on the promise of expense control. We're disciplined in the approach to compensation, and while overall compensation expense rose, of course, with higher revenues, the actions we've taken in the last few years, we meaningfully reduced the ratio, striking a balance between driving ROE and investing in the franchise.

Similarly, our rigorous non-compensation expense program allowed us to keep a tight rein on spending, and thus, drove significant operating leverage. Clearly, we still have work to do to reach our goals, and I believe the progress we have made further underscores the strength of this franchise globally. I'll now turn it over to Ruth to take you through our earnings in detail.

Ruth Porat

Good morning. To provide greater transparency into our results, I will provide both GAAP results and results excluding the effect of DVA. We will present our results this way, whether the impact is positive or negative, and have provided reconciliations in the footnotes to the earnings release to reconcile these non-GAAP measures. DVA in the quarter was negative $2 billion with $381 million in equity sales and trading and $1.6 billion in Fixed Income sales and trading. Excluding the impact of DVA, firm-wide revenues were $8.9 billion, up 24% sequentially, excluding the impact of the MBIA settlement in the fourth quarter. Noninterest expenses were $6.7 billion, up 10% versus the fourth quarter.

Compensation expenses of $4.4 billion this quarter included approximately $138 million related to severance. Non-compensation expenses were $2.3 billion, down 2% from last quarter, reflecting firm-wide cost-containment efforts.

Income from continuing operations applicable to Morgan Stanley common shareholders was approximately $1.3 billion. Net income from continuing operations per diluted share was $0.71 after preferred dividends.

On a reported or GAAP basis, firm-wide revenues for the first quarter were $6.9 billion, up 22% sequentially. Income from continuing operations applicable to Morgan Stanley common shareholders was a loss of approximately $103 million, and the reported net loss from continuing operations per diluted share was $0.05 after preferred dividends.

Book value at the end of the quarter was $30.74 per share. Tangible book value was $27.37 per share. Subsequent to the end of the quarter, we closed on the sale of Quilter and the first phase of the Saxon disposition.

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