This summary is based on the fourth quarter fiscal 2008 earnings call conducted by Morgan Stanley Inc. (MS) on December 17, 2008.
Management:
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Chief Financial Officer, Executive Vice President & Co-Head of Strategic Planning: Colm Kelleher
Key Investors Issues
- The firm reported a net loss from continuing operations of $2.2 billion or $2.24 per share, from $3.57 billion or $3.61 a share in the prior year.
- Net revenues were $1.8 billion, from negative $0.4 billion in 2007.
Full Year Highlights:
- Net revenues were $24.7 billion, 12% below last year
- Net income was $1.71 billion or $1.45 per diluted share, down 49% from $3.21 billion or $2.98 per diluted share, a year ago.
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Fourth Quarter Highlights
The firm reported a net loss from continuing operations of $2.2 billion or $2.24 per share, from $3.57 billion or $3.61 a share in the prior year due to revenue growth.
- Net revenues were $1.8 billion, from negative $0.4 billion in 2007 mostly driven by a 125% growth in institutional securities revenues to $844 million from negative revenues of $3.4 billion in 2007.
- Increase in net revenues in institutional securities reflected lower net mortgage related losses and higher results in commodities, which were partly offset by lower net revenues in IRCC.
Commodities revenues increased substantially from a year ago primarily reflecting higher market volatility and strong customer flow.
- Non-compensation expenses were up 50% sequentially including $725 million of non-cash goodwill and intangibles impairment charge primarily within institutional securities. - The firm reduced its balance sheet with total assets down 33% sequentially to $658 billion, largely driven by a decline in Prime Brokerage and reductions in proprietary trading, interest rates and credit products.
- Leverage was 11.4x and the adjusted leverage was 8x at quarter end, both down substantially from peak levels in 2007 or 32.6x and 18.8x respectively.
Firm expects the absolute value of level three assets to increase due to the volatility seen in the derivatives market especially given the widening of credit spreads.
- The reduction in total assets this quarter exacerbated the ratio of level three assets to the balance sheet.
- Book value per share at November end was $20.24 relatively unchanged from last quarter and up 6% from a year ago, demonstrating an ability to preserve and grow book value in an extraordinarily difficult operating environment.
- Tier-1 ratio is expected to be approximately 18.3% under the SEC’s interpretation of FAS 02 guidelines with the sequential increase driven by new Tier-1 eligible capital.
Risk weighted assets declined sequentially to approximately $282 billion reflecting the combined reduction in total assets offset by an increase in credit risk charges due to the present environment.
- The firm successfully issued $6.6 billion of FDIC guaranteed debt over the month.
- It also repurchased $12.4 billion of firm issued debt which resulted in gains of $2.3 billion this quarter.
Business Highlights:
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Institutional securities reported a pre-tax loss of $2.1 billion and revenues of $844 million reflecting the difficult trading environment and asset write downs.
- Extreme levels of negative sentiment are priced broadly across the credit market spectrum including the investment grade, loans and the ABX sub prime index.
- Of that current market price, CMBX AAA implied unprecedented high default rates.
The CMBX AAA index as a benchmark currently implies a cumulative default rate of greater than 60% over the duration of the underlying bonds assuming 100% loss severity.
- Principle investments revenues were negative $1.8 billion with the majority relating to write downs in real estate limited partnership interests and other principle investments.
- Non-interest expenses decreased 21% sequentially largely reflecting lower compensation which is partially offset by non-cash goodwill and intangible impairment charges of $694 million.
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Investment banking revenues of $743 million were down 28% in an environment with volumes down dramatically across products as completed M&A was down nearly 25%.
- Global equity and debt reached down nearly 50% and the IPO market was virtually shut down in the quarter.
- Despite these conditions the firm advised on several important transactions including Northwest’s merger with Delta, the sale of H Foster Lloyds, the sale of a stake in Fortis Bank to the combined governments of Belgium, the Netherlands and Luxembourg.
- Significant underwriting transactions included equity follow on issues for Wells Fargo and General Electric and bond issues for IBM, [Barrett Gold] and PepsiCo.
Advisory revenues increased 32% sequentially in Europe even though activity slowed measurably in the quarter.
