Morgan Stanley Beats on Higher Equity Trading, Shares Surge

Updated with additional information throughout.

  • Morgan Stanley reports fourth-quarter profit of $573 million or 28 cents per share.
  • Excluding DVA, net income from continuing operations was 45 cents per share. Analysts expected 27 cents per share, according to consensus estimates available at Thomson Reuters
  • Net revenue came in at $7 billion or $7.5 billion excluding DVA, against estimates of $7.07 billion.
  • The bank reported adjusted profit of $1.59 per share in 2012, on revenues of $30.5 billion.

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) swung to profit in the fourth quarter, beating expectations on better-than-expected equity trading and stronger performance from its wealth management unit.

Shares were up more than 6% in pre-market trading.

Net income from continuing operations came in at $573 million or 28 cents per share. Results included a negative impact from the narrowing of Morgan Stanley's debt-related credit spreads (DVA) of $511 million and a tax benefit of $155 million or 8 cents per share. In the fourth quarter of 2011, the investment bank posted a loss of $222 million or 13 cents per share, which included a 58 cent per share loss due to a comprehensive settlement with MBIA.

Banks routinely exclude the accounting impact of DVA when discussing core performance. Excluding DVA, net income from continuing operations was 45 cents per share.

Analysts expected the investment bank to report an earnings per share of 27 cents, according to estimates available at ThomsonReuters.

Net revenue for the quarter came in at $7.5 billion, excluding DVA, against estimates of $7.07 billion.

CEO James Gorman said the investment bank had reached a "pivot point", citing improvement in margins at its global wealth management business and restructuring initiatives at its fixed income trading unit. "Our Firm is now poised to reach the returns of which it is capable on behalf of our shareholders," he said in a statement.

Revenues from institutional securities business rose to $3.5 billion in the fourth quarter from $1.9 billion a year-ago, excluding DVA. Equity sales and trading revenue came in at $1.3 billion. Bernstein analyst Brad Hintz had expected revenues at $985 million, excluding DVA.

Fixed income trading however underperformed relative to expectations, posting a revenue of $811 million. The investment bank said commodities revenue, historically a source of strength for the bank, declined meaningfully in a challenging market.

Morgan Stanley is restructuring its fixed income business, running down securitized products and credit inventories, which will get harsher treatment under new capital rules. It is also considering sale of its commodities unit.

Compensation expenses in the division dropped slightly to $1.5 billion from $1.6 billion in the year-ago quarter.

Compensation expenses as a percentage of revenue(excluding DVA) stood at 42%, an improvement from the year-ago quarter. Still the expenses are likely to get scrutiny, after Goldman Sachs ( GS) set aside only 21% of its revenues in the fourth quarter for compensation.

Gorman said on CNBC Friday morning that the bank had slashed 1,600 jobs in institutional securities and infrastructure support in the past two weeks and was done with the layoffs. More details are likely to be revealed in the conference call with analysts.

Compensation expenses overall dropped 4% to $3.6 billion. Compensation as a proportion of revenues for the firm fell to 52% from 67% a year earlier.

Morgan Stanley has a more bloated compensation structure compared to other investment banks, because it employs more than 17,000 advisers in its wealth management unit who are compensated differently from traders.

The global wealth management business posted stronger-than-expected performance, hitting a pre-tax margin of 17%, the highest in the history of the joint venture. Gorman had said the unit will achieve its target margin of mid-teens in 2013.

Excluding DVA, net revenues for the current year were $30.5 billion compared with $28.6 billion in 2011 and income from continuing operations was $3.2 billion, or $1.59 per share, compared with income of $1.9 billion, or a loss of 8 cents per share a year ago.

The bank had 57,061 employees as on December 2012, down 1% from the previous quarter of 57,726.

Its return on average common equity remains in the low single digits at 3.6%.

-- Written by Shanthi Bharatwaj in New York.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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