Morgan Stanley profits halved following slump

MORGAN STANLEY said its second-quarter profits halved following a slump in trading activity, causing it to miss analysts’ diminished earnings expectations.

Net income from continuing operations in the three months to June was $563 million, or 28 US cents a share, compared with $1.22 billion, or 36 cents a share, in the same period the year before, the bank said yesterday.

Excluding the impact of an accounting quirk tied to the value of the bank’s own debt, which added $350 million of revenue to the companys results in the second quarter, earnings per share were just 16 cents. That was far below the 29 cents expected by analysts.

Relatively impressive first-quarter results had raised investor hopes that Morgan Stanley was successfully coping with lower trading volumes, a dearth of big capital markets deals and new financial regulations, and was still able to generate returns.

But much weaker trading activity, combined with a Moody’s downgrade of the bank’s credit rating, combined to create a 23 per cent drop in net revenues to $7 billion.

“The results reflect a challenging macroeconomic backdrop with tough comparisons to our very exceptional first quarter,” Ruth Porat, chief financial officer, said in an interview. But “we’re not standing still,” she added.

Under the leadership of James Gorman, chief executive, the company has been cutting costs and reducing its dependence on volatile trading and investment banking revenue, by expanding its wealth management business through a joint venture with Citigroup now known as Morgan Stanley Smith Barney.

In wealth management, which includes the Morgan Stanley Smith Barney business, pre-tax earnings rose almost a quarter to $393 million.

But pre-tax income from the bank’s institutional securities division, where it trades stocks and bonds on behalf of clients, fell to $508 million from $1.49 billion in the second quarter of last year. Advisory revenue from deals slumped 50 per cent to $263 million.

Morgan Stanley was last month downgraded two notches from A2 to Baa1 by Moody’s.