Morgan Stanley Posts Loss, Slashes Dividend
Thursday, 23 April 2009

Morgan Stanley posted a wider-than-expected quarterly loss on Wednesday 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 cheered by strong trading results last week at rival Goldman Sachs Group Inc. Morgan shares were down 2.5 percent in late-morning 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 percent to 5 cents a share from 27 cents. The move will let the bank retain an additional $1 billion of equity 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."

First-quarter revenue fell 62 percent to $3.0 billion, dragged down by two major losses.

Morgan, one of the largest commercial real estate investors in the world, recorded $1 billion of net losses on real estate and a $1.5 billion accounting loss on its own debt, reflecting the rising value of Morgan Stanley credit this year.

The same fair-value accounting rules bolstered its results when markets were tumbling and the bank's 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 the first-quarter or the 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 percent 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 writedowns," 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 percent 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 percent from the first quarter of last year, Goldman's rose by 52 percent.

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 62 cents to $24.03 in late-morning trade on the New York Stock Exchange after falling as low as $22.36 earlier. The shares have fallen by half over the last 12 months but have surged about 40 percent this year, including the recent rally sparked by higher-than-expected profit at Goldman.


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