Morgan Stanley Stands Tall - Analyst Blog

Morgan Stanley's (MS) fourth quarter earnings from continuing operationscame in at 43 cents per share, well ahead of the Zacks Consensus Estimate of 35 cents. This represents Morgan Stanley's sixth consecutive quarter of income from continuing operations, post economic crisis. Results also compare favorably with earnings from continuing operations of 18 cents in the year-ago quarter.

Earnings for the reported quarter included negative revenue of 36 cents related to Morgan Stanley's debt-related credit spreads and gain from the sale of its investment in China International Capital Corporation Limited (CICC) of 17 cents (pre-tax).

Considering discontinued operations, Morgan Stanley reported a net incomeof 41 cents per share, compared with 29 cents in the prior-year quarter.

Better-than-expected results were primarily aided by a strong escalationin top line. A boost in revenues from Institutional Securities and Asset Management segmentswere the primary contributors. The quarter also witnessed strong client franchise andimproved performance in almost all of its businesses. As expected, Investment Banking excelled during the quarter. However, these positives were offset partially by higher non-interest expenses. 

For full year 2010, income from continuing operations was $2.44 per share, compared with a loss of 82 cents in 2009. This also surpassed the Zacks Consensus Estimate of $2.26.

Quarter in Detail

Net revenues for the quarter increased 14% year-over-year to $7.8 billion. This also compares favorably with the Zacks Consensus Estimate of $7.6 billion. Revenues for the reported quarter included negative revenue of $945 million related to the debt-related credit spreads compared with $589 million in the year-ago quarter.

For the full year, net revenues were $31.6 billion, up 35% from $23.4 billion in 2009. This also compares positively with the Zacks Consensus Estimate of $31.4 billion. Net revenues for the reported year included negative revenue of $873 million related to the debt-related credit spreads compared with $5.5 billion in 2009.

Net interest income for the reported quarter was $252 million, up 145% sequentially but down 55% year over year. The year-over-year decrease was primarily a result of higher interest expense.

Total non-interest income increased 13% sequentially and 20% year over year to $7.6 billion. Strong Investment Banking revenues were primarily dependable for the sequential jump.  

Total non-interest expenses increased 11% sequentially and 7% year over year to $6.6 billion. Total compensation expenses increased 10% sequentially and 8% year-over-year to $4.1 billion, while total non-compensation expenses increased 12% sequentially and 6% year over year to $2.6 billion. Morgan Stanley's compensation to net revenue ratio for the reported quarter was 52% compared with 54% in the prior quarter and 55% in the year-ago quarter.

Segment Results

Institutional Securities' pre-tax income from continuing operations was $437 million compared with $461 million in the prior-year quarter. Net revenues in this segment were $3.6 billion, up from $3.2 billion in the year-ago quarter.

Global Wealth Management's pre-tax income from continuing operations was $390 million compared with $231 million in the year-ago quarter. Net revenues were $3.4 billion, up from $3.1 billion in the year-ago quarter. The increase primarily reflects higher net interest and commission revenues.

Asset Management's pre-tax loss from continuing operations was $356 million compared with a loss of $37 million in the year-ago quarter. Net revenues for the reported quarter were $858 million, up from $510 million in the year-ago quarter.

As of December 31, 2010, total assets under management were $279 billion, up from $266 billionas of December 31, 2009, reflecting market appreciation, partly offset by net customer outflows primarily in Morgan Stanley's money market funds.

During 2010, Morgan Stanley ranked #1 in global IPOs and global equity and #2 in global completed M&A.

At December 31, 2010, Book value per common share was $31.49, up from $31.25 at September 30, 2010 and $27.26 at December 31, 2009. Morgan Stanley's Tier 1 capital ratio, under Basel I, was approximately 16.0% and Tier 1 common ratio was approximately 10.5% as of December 31, 2010.

Dividend Update

Concurrent with the earnings release, Morgan Stanley declared a quarterly dividend of 5 cents per share. The dividend will be paid on February 15, 2011to shareholders of record on January 31, 2011.

Position of Competitors

Morgan Stanley's close competitors – Citigroup Inc. (C) and The Goldman Sachs Group Inc. (GS) have reported mixed fourth quarter results.

Citigroup reported lower-than-expected results, primarily due to a drop in revenues. Additionally, there was also an escalation in expenses. However, the decrease in loan loss provisions, which was pretty much expected, was the bright spot.

On the other hand, though Goldman's fourth quarter profit came in slightly higher than the Zacks Consensus Estimate, it fell 53% from the year-ago quarter. Slowdown in most of its major divisions due to increased competition and depressed client activity were primarily responsible for the earnings deterioration. European debt problems were also responsible for the lack of conviction among clients.    

Unlike Citigroup and Goldman, another competitor JPMorgan Chase & Co.'s (JPM) fourth quarter earnings came in substantially ahead of the Zacks Consensus Estimate. The better-than-expected fourth quarter earnings resulted from higher non-interest revenue and a slowdown in provision for credit losses. As expected, investment banking witnessed an improvement over the prior quarter with better revenue and client flows. Most of JPMorgan's businesses performed well owing to its continued strategic investments.

Our Viewpoint 

We believe the restructuring initiatives taken by Morgan Stanleyto reduce balance sheet risk will improve its valuation over time. Moreover, its inorganic growth initiatives continue to be significant growth drivers. Nevertheless, the company is still struggling to stay competitive.

Also, the implementation of Basel III is expected to have a significant impact on Morgan Stanley's capital position. Though the company's Tier 1 common ratio is expected to be below the Basel III minimum, given the lengthy period of implementation of the standard, it will not have to raise additional funds in the near term.

Morgan Stanley currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. Consideringthe company's business model and fundamentals, we also maintain a long-term Underperform recommendation on the stock.

 
CITIGROUP INC (C): Free Stock Analysis Report
 
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