Morgan Stanley (MS) said fourth-quarter profit tumbled 59%, as the firm suffered along with rival Goldman Sachs Group Inc. (GS) from a slump in bond markets, while booking a charge of about $1 billion stemming from the passage of a new U.S. tax law in December.
Net income was $686 million, or 29 cents a share, New York-based Morgan Stanley said in a statement. Excluding certain one-time charges and gains, earnings per share were 84 cents a share, exceeding analysts' estimates of 64 cents in a FactSet survey.
This year has seen price swings in bonds and has seen other assets drop to unusually low levels, keeping investors on the sidelines and leaving few opportunities for traders at banks to score gains on big market moves. The dynamic has hampered Wall Street profits, even as the firms' stock prices have rallied on the prospect of looser financial-industry regulation under President Donald Trump's administration and a much-reduced tax bill this year due to a reduction in the U.S. corporate-tax rate.
"We enter 2018 with strong momentum aided by rising interest rates, tax reform and an evolving regulatory framework," Morgan Stanley CEO James Gorman said.
Morgan Stanley's stock price rose after the report, as the firm forecast improvement in its operations this year. Return on tangible common equity -- a key measure of profitability -- should climb to a range of 11.5% to 14.5%, from 9.3% last year excluding the effect of the one-time tax charges. Much of the improvement will be driven by the cut in taxes, with the firm now projecting an effective rate in the range of 22% to 25%, versus an estimated 31% in 2017.
The stock fell by 3 cents to $55.30 as of 11:0 a.m. in New York.
For full-year 2017, Morgan Stanley's profit rose 3% to $6.154 billion.
The firm's revenue from bond trading in the fourth quarter fell by 45% from a year earlier to $808 million, with the business suffering from lower results in government bonds and foreign exchange, according to the statement.
The company also recorded a tax provision of about $1 billion, mainly due to the now-reduced value of tax credits saved up from prior years' losses.
Revenue in the company's wealth management division, consisting of its network of 15,000 financial advisers and 597 brokerage branches, climbed 10% from a year earlier to $4.41 billion. Client assets rose 13% to $2.37 trillion.
The pre-tax profit margin in the company's network of retail brokers was 25.5% for the full year, up from 22% in 2016. The company set a goal of expanding that margin by 2019 to a range of 26% to 28%, according to the statement.
Wall Street as a whole was stymied throughout 2017 by a spell of unusually low price swings in fixed-income and commodities markets, partly explained by the bounty of money pumped into global financial markets over the past decade by the Federal Reserve and other central banks.
For the full year, Morgan Stanley's total revenue trading, including both fixed income and stocks, was down just 0.2%.
The performance, while disappointing, was expected given the low volatility in markets, and compares with an 18% decline in crosstown rival Goldman's overall trading revenue in 2017.
On a conference call with investors on Thursday, Morgan Stanley CFO Jonathan Pruzan said that the early days of 2018 have brought signs of improvement in the markets, spurred partly by higher price volatility due to a recent increase in yields on U.S. Treasury bonds.
"There's more stuff going on," Pruzan said. "We are seeing heavy levels of engagement and a little bit more vol."
The fourth-quarter's doldrums contrasted with those in late 2016, when President Donald Trump's surprise election victory sent investors scrambling to reshape their portfolios for the prospect of big tax cuts. Congressional Republicans passed the tax legislation in December, and Trump signed it soon afterward.
Morgan Stanley was the last of the biggest U.S. banks to report fourth-quarter earnings, and rivals have reported similarly dismal reports from the fixed-income trading.
Goldman Sachs's revenue from the business tumbled by 50% from a year earlier. JPMorgan Chase & Co. (JPM) , the biggest U.S. bank, booked a 34% decline. At Citigroup Inc. (C) , bond-trading revenue slid 23%, and it was down 14% at Bank of America Corp. (BAC) .
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