Morgan Stanley posted a wider-than-expected quarterly loss and slashed its dividend as real estate investment losses and a debt-related charge wiped out trading gains.
The loss, the third in six quarters for the investment bank and brokerage, disappointed investors who were hopeful after strong trading results last week at rival Goldman Sachs Group Inc. Morgan shares were down 4.75% in midday trading.
“I guess this shows not all banks are alike. It looks like (Chief Executive) John Mack took less risk and missed out on a chance to pick up some trading revenue,” said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.
Morgan posted a net loss applicable to common shareholders of $578 million, or 57 cents a share, for the first quarter, compared with shareholder income of $1.31 billion, or $1.26, in the comparable period last year. Analysts on average expected a loss of 9 cents a share, according to Reuters Estimates.
The bank cut its quarterly dividend by 80% to 5 cents a share from 27 cents. The move will save the bank an additional $1 billion a year.
“We remain cautious,” Chief Financial Officer Colm Kelleher said in an interview, though he stressed Morgan Stanley has more than enough capital and cash on hand to go back on offense.
“We're ready to go when we see risk-adjusted returns,” he said. “We've made no secret 2008 was hugely challenging for the industry and 2009 we always saw as a year of transition. An extra three months of being safe to me is not a mortal sin.”
To the extent the bank would make acquisitions, it would focus on expanding or complementing its wealth management business, Kelleher said on a conference call.
First-quarter revenue fell 62% to $3.0 billion, dragged down by two major losses.
Morgan, one of the world's largest commercial real estate investors, recorded $1 billion of net losses on commercial real estate, an area widely seen as a source of new writedowns for banks and insurers.
“It is my single biggest worry,” Kelleher said.
Morgan also took a $1.5 billion accounting loss on its own debt, reflecting the rising value of Morgan credit this year. The same fair-value accounting rules bolstered its results when markets were tumbling and its bonds were under pressure. Morgan booked $3.5 billion of revenue in the fourth quarter and $900 million in the third quarter from this item.
The first-quarter results were the first since Morgan, which became a bank holding company in September, adopted a calendar year reporting schedule. In December, a month that was not included in either its first-quarter or its fiscal fourth-quarter results, the bank had a net loss applicable to shareholders of $1.6 billion.
Morgan's fixed income sales and trading revenue dropped 58% to $1.3 billion, in contrast to Goldman Sachs, which last week posted $6.56 billion of trading revenue from fixed income, currency and commodities, more than double the level in its first quarter last year.
“People had expected the credit desk trading profits to be a pleasant surprise, and I think they were OK, but they were just overwhelmed by the negative surprises in the write-downs,” said Michael Holland, founder of New York money management firm Holland & Co.
Morgan is also taking less risk than Goldman Sachs, by at least one measure.
Morgan's value at risk, the largest possible trading loss on 95% of the quarter's trading days, was $115 million, compared with Goldman's $240 million. And while Morgan's value at risk was up 16% from the first quarter of last year, Goldman's rose by 52%.
Morgan's large commercial real estate exposure could be problematic in the future.
Brokerage house Fox-Pitt Kelton estimated that commercial real estate represented, on average, 23% of the loans of the almost 60 banks it covers. Bad real estate investments are widely seen as having been a major factor in Lehman Brothers Holdings Inc's demise in September.
Morgan said at the end of March that if every asset in its commercial mortgage portfolio defaulted and it recovered nothing, its potential loss would be $4 billion.
Goldman and Morgan both switched to a fiscal year ending in late December from one ending in November. Morgan recast its 2008 quarterly results to match the current quarter, while Goldman did not.
Morgan shares were down $1.17, or 4.75%, to $23.48 in midday trade on the New York Stock Exchange after falling as low as $22.36 earlier. The shares fell by half over the last 12 months but surged about 40% this year, including the recent rally sparked by higher-than-expected profit at Goldman. (Reuters)