Morgan Stanley falls on Asia loss

New York - Morgan Stanley tumbled 4.8 percent after reporting a loss related to private-equity investments in China and posting what Chief Executive Officer James Gorman called the worst quarter for fixed income since the financial crisis.

The decline was the biggest since August 24 and pushed this year’s drop to 17 percent, the most among banks in the Standard & Poor’s 500 Financials Index. The shares fell to $32.32 at 4.15pm in New York.

Gorman, who has attracted investors with his vow to run a less volatile bank, oversaw the biggest quarterly revenue drop in three years. Morgan Stanley had the largest trading decline among the top US banks in the third quarter, and investment- management revenue sank 59 percent as the firm wrote off performance fees it had accrued in its Asia private-equity business.

“We had an unusual hiccup in the merchant bank, which is highly unlikely to repeat itself,” Gorman said on Monday on a conference call with analysts after the New York-based company announced results. “We’re not complacent, but on the other hand, we don’t have a knee-jerk reaction to a 13-week period, and a very unusual 13-week period at that.”

Third-quarter net income fell to $1.02 billion, or 48 cents a share, from $1.69 billion, or 83 cents, a year earlier, the company said in a statement. Excluding an accounting gain and legal expenses, profit was 42 cents a share, missing the 63-cent average estimate of 23 analysts surveyed by Bloomberg.

‘Forget ASAP’

“We don’t think this quarter says anything negative about Morgan Stanley’s safety and soundness, but it looks like one they’d like to forget ASAP,” Chris Kotowski, an analyst at Oppenheimer & Company, said in a note to investors.

Revenue, excluding accounting adjustments known as DVA, declined 16 percent to $7.33 billion. Book value per share climbed to $34.97 from $34.52 at the end of June. The firm’s return on equity, a measure of how well it reinvests earnings, was 3.9 percent for the quarter.

Third-quarter revenue from fixed-income sales and trading dropped 42 percent to $583 million, excluding DVA. That fell short of estimates of $872 million from Steven Chubak, an analyst at Nomura., and $850 million from Goldman Sachs Group’s Richard Ramsden.

“It still calls into question, what is the right size of the FICC business that you need longer term, and are they able to generate the returns that they want in that business,” Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods, said in a phone interview, referring to fixed income, currencies and commodities.

Goldman, JPMorgan

Goldman Sachs and JPMorgan Chase & Company last week also reported profit that missed analysts’ estimates on declines in bond-trading revenue. Bank of America and Citigroup posted earnings that benefited from expense reductions.

In equities trading, Morgan Stanley’s revenue declined 0.8 percent from a year earlier to $1.77 billion, excluding DVA. That compared with $1.16 billion at Bank of America and $1.72 billion at Goldman Sachs. Chubak estimated equities revenue of about $1.89 billion, while Ramsden predicted $1.93 billion.

Earlier this month, Morgan Stanley shuffled management in the two businesses that drove the earnings miss. The firm rewarded Ted Pick for taking the equity business to the top spot globally by putting him in charge of all trading under Colm Kelleher. The bank also named Dan Simkowitz, who was co-head of the unit that underwrites stocks and bonds, to run its asset-management unit.

Fleming’s goal

The investment-management division posted revenue of $274 million, down from $667 million a year earlier. The unit had $235 million in negative revenue in its investments category, and “virtually all” of that loss came from the firm writing off two-thirds of the carried interest it had accrued in its Asian private-equity business, Chief Financial Officer Jon Pruzan said in an interview.

The Asian private-equity business “invests primarily in highly structured minority investments and control buyouts” and has taken stakes in more than a dozen Chinese companies, according to Morgan Stanley’s website. While many of those companies don’t trade publicly, at least six declined more than 20 percent on public exchanges in the third quarter. Sparkle Roll Group, which distributes luxury goods, dropped 28 percent in Hong Kong and Chinese shares of polyester-filament producer Tongkun Group plunged 50 percent. The website didn’t detail the size of the investments in each company or whether the firm had sold the stake.

The loss “certainly was not what you would expect for a company that’s migrating to these fee-based businesses, which are supposed to be less volatile,” Kleinhanzl said.

The brokerage unit posted net income of $509 million on net revenue of $3.64 billion. The unit had a 23 percent pretax margin. The bank has said it can reach a margin of 22 percent to 25 percent by the end of this year even without help from higher markets or interest rates.

The quarter was mostly “consistent with who we’ve been in the past”, Pruzan said in the interview. “We had very strong results in investment banking, our equities business and stability in wealth management. We had underperformance in fixed income, and then we had two discrete items if you will this quarter,” referring to higher legal costs and the Asian loss.

“Clearly not a good quarter, but it was one quarter,” Pruzan said.

* With assistance from Katherine Chiglinsky in New York

BLOOMBERG