January 18, 2013

Morgan Stanley at ‘Pivot Point,’ Says CEO, as Firm Tops Earnings Estimates

Gorman adds that he’s comfortable with current headcount and that the wealth management unit has a pretax profit of 17%

Morgan Stanley CEO James Gorman on Fox Business Network in April. (Photo: AP) Morgan Stanley CEO James Gorman on Fox Business Network in April. (Photo: AP)

The head of Morgan Stanley (MS), which reported fourth-quarter earnings Friday that beat market expectations, said the firm has reached a critical juncture in its turnaround.

“After a year of significant challenges, Morgan Stanley has reached a pivot point,” said CEO James Gorman in a press release, pointing at the results of its wealth management operations, which had pretax margins of 17% in Q4.

“We demonstrated meaningful progress in our wealth management joint venture [with Smith Barney], reaching the highest pretax margin since the inception of the JV. We charted a path to acquire the remainder of the JV … Our firm is now poised to reach the returns of which it is capable on behalf of our shareholders.”

In the fourth quarter, income from continuing operations was $573 million, or $0.28 per share, including a net tax benefit of about $155 million, or $0.08 per share, compared with a loss of $222 million, or $0.13 per share, for the year-ago quarter.

Excluding its debt valuation adjustment, or DVA, net revenues for the current quarter were $7.5 billion compared with $5.5 billion a year ago, and income from continuing operations was $894 million, or $0.45 per share, compared with a loss of $349 million, or $0.20 loss per share, last year.

Equity analysts had expected the company to earn $0.27 per share in the most-recent quarter.

The company said it had revenues of $7 billion for the fourth quarter vs. $5.7 billion a year ago and $5.3 billion in the previous quarter.

Comp Costs

Compensation expenses of about $3.6 billion in the fourth quarter declined 8% from $3.9 billion in the prior quarter and 4% from $3.8 billion a year ago.

Morgan Stanley had 57,061 employees at the end of the fourth quarter, down 1% from the previous quarter and 7% from a year ago, when it had 61,546 employees.

Last week, Morgan Stanley said it would cut 1,600 jobs, mainly in its investment banking and other institutional-services operations in the United States and overseas. Speaking with Bloomberg TV on Friday, though, Gorman said that he didn’t expect further layoffs.

"We are very comfortable with the headcount we have right now … ,” Gorman told Bloomberg. “We are down 6,000 people from 12 1/2 months ago. It is pretty incredible. That's now built into our run rate of expenses. We feel very comfortable with where we are now."

On Tuesday, it was reported that Morgan Stanley employees who make more than $350,000 a year, like traders and investment bankers, set to receive cash bonuses of $50,000 and up, will have these payments deferred and also paid out with both cash and stock through 2015.

Commenting on this deferred comp, Gorman told Bloomberg, “It aligns our risk profile with our activities, so that we have a proper alignment between our interest, our shareholders interest and our employee interest. It reflects the environment we have been operating in."

In terms of further business restructuring, Morgan Stanley says it isn’t planning to move out of the fixed-income field. "I think it would be completely foolish for Morgan Stanley to even approach that concept … [I]n our capital markets business, we do $500 million in revenues in fixed income underwriting in the last quarter alone,” Gorman explained.

Wealth Results in Q4

Morgan Stanley’s Global Wealth Management Group reported pretax income from continuing operations of $581 million, up 144% compared with $238 million in the fourth quarter of last year and up 143% from $239 million in the third quarter of 2012.

Net revenues for the current quarter were $3.5 billion, compared with $3.2 billion a year ago and $3.3 billion in the third quarter. Pretax income after the noncontrolling interest allocation to Citigroup was $474 million.

(In the third quarter, Morgan Stanley completed the purchase of an additional 14% stake in the Smith Barney joint venture from Citi, increasing the firm’s interest from 51% to 65%.)

Asset management fee revenues of nearly $1.9 billion increased 16% from last year’s fourth quarter and 4% from the third quarter. Fees & commissions were down 8% year over year, but up 11% sequentially, to $579 million.

Compensation expense for the current quarter was $2 billion compared with $2.1 billion a year ago. Non-compensation expenses were $901 million compared with $922 million a year ago.

Total client assets were $1.8 trillion at quarter end, with client assets in fee-based accounts accounting for $573 billion, or 32% of total client assets. Global fee-based asset flows for the quarter were $3.7 billion vs. $7.5 billion in the third quarter and $4.8 billion in the year–ago quarter.

The number of financial advisors, 16,780, was down 29 from the prior quarter and off 4% from last year’s tally of 17,512.

Average annualized revenue per global representative was $824,000 in the fourth quarter, an improvement of 4% from the prior quarter and 13% from last year.

On Thursday, Merrill Lynch said it had 16,413 advisors, with average annualized revenue of $935,000. Its global wealth unit had a pretax margin of 21%.

Total client assets per Morgan Stanley advisor were $106 million in Q4, an increase 1% from last quarter and 14% from last year.

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See the Q4 2012 Earnings Calendar for more earnings season coverage.

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