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Morgan Stanley Posts Q2'09 Loss, SB Venture Boosts Wealth Sales

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Morgan Stanley says it had a loss from continuing operations in the second quarter ended June 30 of $159 million vs. income of $689 million a year ago. Net revenues for the quarter were $5.4 billion, compared with $6.1 billion last year, and non-interest expenses were $6.0 billion, compared with $5.2 billion in ’08.

Compensation expenses were $3.9 billion vs. $3.1 billion last year, while non-compensation expenses increased slightly from a year ago.

Comparisons of current-quarter results to prior periods are impacted by the results of the Morgan Stanley Smith Barney joint venture (MSSB), which closed on May 31, 2009, the company says.

The joint venture, MSSB, created a new wealth-management business with 18,444 global representatives and $1.4 trillion in client assets, according to a statement. It is being led by James Gorman and Charles Johnston.

The nearly 18,450 Morgan Stanley Smith Barney advisors had average annualized revenue of $671,000 and average client assets of $77 million, according to Morgan Stanley’s second-quarter press release.

This marks an improvement from where Morgan Stanley advisors, on their own, were three months ago.

Morgan Stanley had 8,148 financial advisors at the end of the first quarter, March 31.These reps now had annualized revenue of about $630,000 in March, a 20 percent drop for the previous year’s $772,000 but above the $603,000 of the quarter ended December 31, 2008.

Total client assets for Morgan Stanley advisors stood at about $525 billion on March 31, down some 25 percent from a year ago. Assets owned by clients with more than $1 million in assets represent 67 percent of total assets. And fee-based assets stand at roughly 24 percent of total assets.

Client assets per Morgan Stanley advisor were $64 million on average, in March, down from $85 million a year ago and $66 million in the quarter ended December 31, 2008.

As for Citi-Smith Barney, it reported 12,659 financial advisors in the first quarter of 2009, including bankers. These advisors had $1.2 trillion in assets under management, and $2.62 billion in revenue for the quarter ended March 31, 2009 – representing about $207,000 per advisor.

Combining average revenue per FA at Citi-Smith Barney in from Q1’08 through Q1’09, the advisors had about $850,000 of sales and commissions per advisor.

Global wealth management group had a net profit of $47 million after the non-controlling interest allocation to Citigroup and before taxes. Other results included:

- Net revenues of $1.9 billion, up 13 percent from a year ago as higher revenues related to MSSB were partly offset by the impact of weaker market conditions.

- Non-interest expenses of $2.0 billion, an increase of 40 percent from a year ago, primarily reflected the operating results of MSSB and $245 million in integration costs, which include a one-time expense of $124 million for replacement deferred compensation awards; the cost of these replacement awards is fully allocated to Citigroup.

- Compensation expenses of $1.4 billion, which includes the cost of the replacement awards noted above, compared with $1.0 billion from a year ago; non-compensation expenses were $0.6 billion, compared with $0.4 billion a year ago, reflecting the operating results and integration costs related to MSSB as well as a charge of $25 million related to the FDIC special assessment on – deposits announced in May.

- Total client assets of $1.42 trillion at quarter-end include assets in fee-based accounts of $325 billion, or 23 percent of total client assets.

Morgan Stanley Corporate Results
At the corporate level, Morgan Stanley had negative revenue of $2.3 billion in 2Q’09 related to the continued tightening of its credit spreads on certain of its long-term debt and a negative adjustment of $0.74 per diluted share for the accelerated amortization of $850 million, which was related to the issuance discount on the company’s Series D preferred stock resulting from the repurchase of capital issued under the Capital Purchase Program (or TARP).

Net income for the quarter was $33 million, compared with close to $1.2 billion in the second quarter of 2008.

Still, the company says, it was able to report the following – generally positive — developments:

Investment banking delivered strong results with underwriting revenues up 19 percent from last year’s second quarter. Morgan Stanley ranked #1 in global announced M&A.4

Fixed income sales and trading net revenues of $1.0 billion reflect a loss of $1.3 billion related to the tightening of MS debt-related credit spreads which was partly offset by strong results in investment grade and distressed debt trading.

Equity sales and trading net revenues of $0.7 billion reflect a loss of $0.8 billion related to the tightening of MS debt-related credit spreads. Results also reflect lower net revenues in derivatives and the cash businesses, including prime brokerage.

Asset Management results reflect losses in the Merchant Banking business, primarily driven by real estate, which were partly offset by profitable results in the Core business.5

Firm results reflect net losses on investments in real estate of $0.7 billion, amidst the industry-wide decline in this market.

Morgan Stanley and Mitsubishi UFJ Financial Group, Inc. (MUFG) announced a series of initiatives to further strengthen their strategic alliance, including the formation of a loan marketing joint venture for the Americas and a referral agreement for commodities transactions outside Japan.


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