Morgan Stanley: Earnings Loser (Update 1)

Updated from 1:59 p.m. ET with market close information, total returns and stock ratios.

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the loser on Thursday among the largest U.S. financial names, with shares sliding more than 5% to close at $20.31.

The broad indices were all showing declines, after the Department of Labor said first-time unemployment claims for the week ended April 13 rose 4,000 to 352,000, from the previous week's revised figure of 348,000. Economists polled by Thomson Reuters had expected jobless claims to come in at 350,000. The four-week moving average for first-time unemployment claims increased by 2,750 to 361,250.

In its economic commentary early on Wednesday, Deutsche Bank's research team said Thursday's unemployment claims numbers would "take on added significance," because a spike in claims the previous week was caused by the Easter holiday, which came early this year.

UBS economist Maury Harris early on Thursday forecast the unemployment claims number would be little changed and also that the Federal Reserve Bank of Philadelphia's index of regional factory activity would increase to a reading of 5.0 for April from 2.0 in March. A reading above zero indicates expansion.

The Philadelphia Fed later announced that the index reading for April was just 1.3. "The indicator for overall activity remained slightly positive this month," the bank said in a statement "but other broad indicators were mixed. Indicators for new orders and employment were weaker this month." The consensus among economists is for the Philadelphia Fed's index of current activity to come in at 3.3.

The KBW Bank Index ( I:BKX) was down 1% to 54.20, with 17 of the 24 index components showing afternoon declines, including Bank of America ( BAC), which was down over 2% to $11.44, following a 5% decline on Wednesday.

Morgan Stanley

Morgan Stanley early on Thursday reported first-quarter earnings from continuing operations -- excluding debit valuation adjustments -- of $1.177 billion, or 61 cents a share, compared to $1.343 billion, or 71 cents a share, in the first quarter of 2012.

Net revenues excluding DVA were $8.457 billion in the first quarter, increasing from $7.477 billion the previous quarter, and $8.902 billion a year earlier.

On an unadjusted basis, Morgan Stanley's securities sales and trading revenue grew to $2.965 billion in the first quarter from $1.667 billion in the fourth quarter and $2.282 billion in the first quarter of 2012. Underwriting revenue totaled $694 million in the first quarter, declining from $772 million the previous quarter and $538 million a year earlier.

Morgan Stanley CEO James Gorman said "in Global Wealth Management, our operating pre-tax profit was the highest in our history, and we look forward to completing the acquisition of the remaining 35% of our wealth management joint venture once we have obtained full regulatory approval." The company has agreed to purchase the remaining 35% stake of the former Morgan Stanley Smith Barney joint venture with Citigroup ( C).

The Global Wealth Management unit's revenue increased 4% sequentially and 5% year-over-year, to $3.470 billion in the first quarter.

Atlantic Equities analyst Richard Staite said in a note to clients that Morgan Stanley's first-quarter results were actually "broadly in line" with estimates, since they included a tax benefit of $142 million, or 7 cents a share.

Please see TheStreet's earnings coverage for a full rundown of Morgan Stanley's first quarter, along with analysts' reaction.

Morgan Stanley's shares have returned 6% this year, following a 28% return during 2012. The shares trade for 0.7 times their reported March 31 tangible book value of $27.39, and for 8.0 times the consensus 2014 EPS estimate of $2.54. The consensus 2013 EPS estimate is $2.10.

MS Chart MS data by YCharts

Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.

Bank of America

Shares of Bank of America were down again on Thursday following a 5% decline on Wednesday, after the company announced disappointing first-quarter results.

Bank of America on Wednesday reported a first-quarter profit of $2.6 billion, or 20 cents a share, increasing from $732 million, or 3 cents a share in the fourth quarter, and $653 million, or 3 cents a share, in the first quarter of 2012. The fourth quarter reflected $2.5 billion in costs for independent foreclosure reviews, and $2.7 billion in charges related to the company's mortgage putback settlement of a long-term dispute with Fannie Mae ( FNMA).

Bank of America's first-quarter revenue totaled $23.7 billion, increasing from $22.5 billion a year earlier, and coming in ahead of the consensus estimate of $23.41 billion.

The Fannie Mae settlement led to a great reduction in the outstanding mortgage repurchase claims against Bank of America. Investors' mortgage repurchase claims against the company totaled $28.3 billion as of Dec. 31. Bank of Americas fourth-quarter earnings presentation implied that the Fannie Mae settlement would reduce the putback claims by roughly $12.2 billion, leaving about $16.1 billion in claims.

But the company reported outstanding mortgage repurchase claims of $17.135 billion as of March 31, showing that new claims were continuing to come in.

Bank of America's first-quarter net interest income was $10.875 billion, increasing from $10.555 billion in the fourth quarter, but declining from $11.053 billion in the first quarter of 2012. The sequential increase ran counter to the industry trend. Bank of America's net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- widened to 2.43% in the first quarter from 2.35% in the fourth quarter, although the margin was down from 2.51% in the first quarter of 2012.

First-quarter noninterest income totaled $12.833 billion, increasing from $8.336 billion the previous quarter and $11.432 billion a year earlier. The company's trading account profits rose to $2.989 billion in the first quarter, from $792 billion in the fourth quarter and $2.075 billion in the first quarter of 2012.

In line with the industry trend Bank of America's gain-on-sale margin for mortgage loans declined to 3.26% in the first quarter from 4.38% in the fourth quarter. First-quarter mortgage banking income totaled $$1.263 billion, improving from a negative $540 million in the fourth quarter (reflecting the Fannie Mae settlement), but declining from $1.612 billion in the first quarter of 2012.

Bank of America said its litigation expenses totaled $881 million during the first quarter, compared to $916 million the previous quarter and $793 million a year earlier. First-quarter litigation expenses included $500 tied to a settlement of a class action suit by mortgage-backed securities investors against Countrywide, which Bank of America acquired in 2008.

Credit quality continued to improve, with first-quarter net loan charge-offs of $2.517 billion, declining from $3.104 billion the previous quarter and $4.056 billion in the first quarter of 2012. The first-quarter annualized ratio of net charge-offs -- excluding impaired purchased loans, which had previously been written down -- to average loans improved to 1.14%, from 1.40% the previous quarter and 1.80% a year earlier.

Sterne Agee analyst Todd Hagerman has a neutral rating on Bank of America, and said in a note to clients on Thursday that the bank's legacy mortgage-related expenses were "a stubborn sore spot."

"While management has made considerable strides restructuring BAC and reducing the risk profile, core profitability and book value growth have been elusive," Hagerman wrote. On a positive note, the analyst wrote, "to be sure, BAC offers a fair amount of expense leverage going forward. However, the tail risk tied to BAC's legacy mortgage exposure continues to cause investor angst."

Atlantic Equities analyst Richard Staite sees a buying opportunity for investors, saying in a report on Thursday that "we think the restructuring story remains on track and believe quarterly EPS will rise to $0.30 by Q4." All of this improvement, according to Staite, will come on the expense side: "reduction in retirement eligible costs $900m ($0.06/share), reduction in Legacy Asset Servicing cost $500m ($0.03/share), New BAC cost savings $300m ($0.02/ share) and reduced preference share dividends $125m ($0.01/share)."

Bank of America's shares are down 1% this year, after more than doubling during 2012. The shares trade for 0.9 times their reported March 31 tangible book value of $13.46, and for 8,8 times the consensus 2014 EPS estimate of $1.30. The consensus 2013 EPS estimate is 98 cents.

BAC Chart BAC data by YCharts

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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