Morgan Stanley (MS)
Q1 2009 Earnings Call Transcript
April 22, 2009 11:00 a.m. ET

Executives

Colm Kelleher – Executive Vice President, Chief Financial Officer & Co-Head of Strategic Planning

Analysts

Michael Mayo – Deutsche Bank
Kian Abouhossein – JPMorgan
Guy Moszkowski – Bank of America Securities/Merrill Lynch
Howard Chen – Credit Suisse
Steve Stelmach – Friedman, Billings, & Ramsey & Co.
Chris Kotowski – Oppenheimer & Co.
Roger Freeman – Barclays Capital
Meredith Whitney – Meredith Whitney Advisory Group LLC
Richard Ramsden – Goldman Sachs & Co.
James Mitchell – Buckingham Research Group

Presentation

Operator

Welcome to the Morgan Stanley conference call. The following is a live broadcast by Morgan Stanley and is provided as a courtesy. Please note that this call is being broadcast on the Internet through the company’s website at www.morganstanley.com. A replay of the call and webcast will be available through the company’s website and by phone through May 22, 2009.

This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management’s current estimates, projections, expectations or belief and which are subject to risks and uncertainties that may cause actual results to differ materially.

For a discussion of additional risks and uncertainties that may affect the future results of the company, please see the company''s Annual Report on Form 10-K for the year ended November 30, 2008 and the company''s current reports on Form 8-K. The presentation may also include certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures are included in our Annual Report on Form 10-K and our current reports on Form 8-K, which are available on our website www.morganstanley.com.

Any recording, rebroadcast, or other use of this presentation in whole or in part is strictly prohibited without prior written consent of Morgan Stanley. This presentation is copyrighted and proprietary to Morgan Stanley.

At this time, I’d like to turn the program over to Colm Kelleher for today’s call.

Colm Kelleher

Good morning everyone and thank you for joining us. Today we will review our quarterly results and provide an update on our strategic initiatives. We''ve been firm in our view that 2009 would be a year of transition and the first quarter reflects that cautious view. For the calendar quarter ended March 31, we reported a net loss of $0.57 per share, excluding the impact of Morgan Stanley''s debt related credit spreads earnings per share would have been positive $0.37.

While the rebound in our bond prices drove the loss this quarter, this movement demonstrates the markets’ confidence and Morgan Stanley''s financial strength is an important validation of our franchise. As you know, the first quarter was punctuated by ongoing government policy to promote market stability, while these efforts have had some positive impact, economic conditions are still uncertain.

Our economist’s forecast the base case contraction in world GDP of roughly 2% for 2009, the first decline in more than 60 years. Market conditions continue to be erratic in the quarter and real estate markets deteriorated significantly around the world. Morgan Stanley is a strong beneficiary of the changing competitive landscape as a dominant industry participant with robust capital levels. We are well positioned for recovery in the global capital markets and are not limited by a large loan portfolio or direct consumer exposure. Already we are experiencing better pricing and market share gains across our principal businesses resulting in good operating earnings this quarter.

As we navigate these markets, we are executing on a number of strategic initiatives that position us for outperformance. Within institutional securities, we continue to target our capital on a risk-adjusted basis, and we remain focused on reducing legacy positions. In March, we signed a memorandum of understanding with MUFG to combine our Japanese securities businesses creating the third largest brokerage franchise in Japan with dominant market presence and global reach. The MUFG joint venture will form a preeminent leader in both M&A and debt financing with full year pro forma 2008 operating revenues of $2.5 billion. This partnership underscores our strong global commitment and our goal of continuing to realize attractive growth opportunities.

In January, as you are well aware we announced the formation of a joint venture with Smith Barney creating the largest wealth management firm. The integration is on schedule and we expect the deal to close in the third quarter ’09 if not sooner. Asset management continues to be constrained by poor performance and the downturn in real estate. Turning around this business remains a top priority. We are upgrading investment talent and have implemented a number of cost initiatives. In November, we committed $2 billion in firm-wide cost savings for 2009. In the first quarter, we made significant progress towards achieving this goal.

Compensation expense excluding severance was down 47% from a year ago as we managed compensation to reflect the lower revenue environment as well as significant headcount reductions. We reduced non-compensation expenses by 9% from a year-ago driven by lower brokerage and clearing expenses from lower activity and tighter expense controls around professional services and business development globally.

Now, turning to our consolidated results. We continue to demonstrate strength in our industry leading business including commodities, foreign exchange, interest rates, equity derivatives, investment banking, and global wealth management. In accordance with SEC guidelines we recasted 2008 to a calendar year. This enhanced disclosure facilitates comparisons across quarters and amongst our bank holding company peers. This quarter we are providing even great transparency in our financial supplement by including firm-wide real estate investment exposures and their corresponding P&L impact, tangible common equity, a currently popular measure and tangible book value per share.