This summary is based on the third quarter fiscal 2008 earnings call conducted by Morgan Stanley (MS) on September 16, 2008.
Management:
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Chief Financial Officer, Executive Vice President & Co-Head of Strategic Planning: Colm Kelleher
Key Investors Issues
- Net income was down 3.4% to $1.42 billion or $1.32 a share.
- Revenues were up by 1% to $8 billion.
- The firm declared a dividend of 27 cents per share.
Year to Date Highlights:
- Income from continuing operations was $4 billion or $3.72 per diluted share, down 35% from $6.15 billion, or $5.79 per diluted share a year ago.
- Net revenues decreased 20% to $22.9 billion.
- The annualized return on average common equity from continuing operations was 16.1%, compared with 25.5% a year ago.
Third Quarter Highlights
The firm generated net income of $1.42 billion or $1.32 a share, down 3.4% from $1.37 billion or $1.38 a share in the prior year, giving a return on equity of 16.5%.
- Firm-wide net revenues were $8 billion, from $7.96 billion in the prior year as non-interest expenses were $6.1 billion, up 20% from the prior period driven by higher compensation.
- Non-compensation expenses were $2.4 billion up 14% from last quarter driven by an auction rate securities provision on the operating results at present, both of which are predominantly reflected in other expenses.
The firm continues to accrue compensation based on the earnings level on assessment of the market and the year-to-date compensation ratio is 47%.
- During the quarter, the firm sold an additional portion of its investment in MSCI through a secondary offering that resulted in a $745 million gain.
- Furthermore, institutional securities results included approximately $1.5 billion of revenue for the widening of credit spreads on firm issued structured notes of which $941 million were recorded in fixed income and $509 million in equity.
- Exclusive of these items in both quarters and the gain from the sale of the Spanish wealth management business last quarter, revenues increased 19%, underscoring the breadth and depth of Morgan Stanley’s underlying client franchise.
This strong revenue growth included net losses of $1.3 billion related to trades and write-downs of legacy positions including mortgage-related assets, monolines and leverage lending.
- In addition, last month, the firm announced its intention to repurchase at par approximately $5 billion of auction rate securities held by retail accounts of the firm.
- This has resulted in a provision of $288 million for the estimated difference between the purchase price and the market value of these securities at the date of purchase and other losses.
- Given the volatility of the markets, the firm remains very focused on maintaining a strong capital position, high levels of liquidity and prudent leverage ratios.
- An increase in Tier 1 ratio to 12.7% is driven by retained earnings and stable risk-rated asset levels.
Total liquidity which includes liquidity at the parent company, bank and non-bank subsidiary levels was $179 billion and averaged $175 billion in the quarter up 30% from the $135 billion average last quarter.
- Parent company liquidity was $77 billion and averaged $81 billion up from an average of $74 billion in the second quarter.
- Banks and non-bank subsidiaries liquidity position was $102 billion and averaged $94 billion in the quarter versus an average of $61 billion last quarter.
- Because of higher levels of liquidity, the firm has further reduced its commercial paper outstanding to $7.8 billion for this quarter end down $4.5 billion from last quarter.
- The total notional amount of all secured financing was $311 billion and a relatively small portion 22% of this is overnight.
Business Highlights:
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Institutional Securities net revenues of $5.9 billion which included the revenue in all structured notes and gain from MSCI was 63% higher than the second quarter.
- Non-interest expense of $3.7 billion increased 27% from the prior period predominantly reflecting an increase in compensation.
- Pre-tax income was $2.2 billion and the return in equity in this sector was 29%.
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Investment banking increased revenues across all categories despite subdued market volumes.
- Investment banking revenues were $1 billion up 18% from the last quarter driven by higher revenues in equity and fixed income underwriting.
- During the quarter, the firm advised on several important transactions including Verizon Wireless’ acquisition of Alltel and Dow Chemicals’ acquisition of Rohm and Haas.
- Significant underwriting transactions included the European rights offering for UBS, [HBOS] and Imperial Tobacco as well as Rio Tinto’s issuance of investment grade debt.
- The firm is also advising the US Treasury of strategic alternatives for Fannie Mae and Freddie Mac and view this as a testament to the strength of its investment banking franchise.
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Advisory revenues of $401 million increased 9% from the second quarter while it strengthened the US and Asia although overall M&A volumes remain subdued.
- Underwriting revenues increased 24% to $631 million.
- Driven by participation in the majority of the European financial rights issuances, equity underwriting revenues of $379 million were up 27% from last quarter.
- Fixed income underwriting increased 20% to $252 million reflecting higher revenues from lower than non-investment grade issuance as well as improved results in securitized products which were partially offset by slowed investment grade issuance.
- Total sales and trading revenues of $4.2 billion up significantly from last quarter across both equity and fixed income sales and trading.
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In equity sales and trading revenues were $2.7 billion, 27% higher than the second quarter of 2008, reflecting continued strength in prime brokerage and derivatives partially offset by seasonally lower commissions.
- Prime brokerage reported record revenues this quarter with average customer balances essentially unchanged from last quarter.
- Derivative revenues were flat to last quarter as better trading opportunities driven by volatility were offset by the absence of seasonal revenues.
- Cash equity revenues declined 16% from last quarter on seasonally lower activity levels.
