|Morgan Stanley Reports First Quarter 2010:|
For a printable copy, click here.
NEW YORK, April 21, 2010 – Morgan Stanley (NYSE: MS) today reported income of $1.8 billion, or $1.03 per diluted share, from continuing operations applicable to Morgan Stanley for the first quarter ended March 31, 2010, compared with a loss of $17 million, or $0.41 per diluted share, for the same period a year ago. Net revenues were $9.1 billion for the current quarter, compared with $2.9 billion a year ago. Net revenues in the prior year's first quarter included negative revenue of $1.7 billion due to the significant improvement in Morgan Stanley's credit spreads on certain of its long-term debt (debt-related credit spreads).1 The effect of changes in Morgan Stanley's debt-related credit spreads in the current quarter was minimal. Comparisons of current quarter results with the prior year were affected by the results of the Morgan Stanley Smith Barney joint venture (MSSB),2 which closed on May 31, 2009. The results for this quarter also included a tax benefit of $382 million associated with prior year undistributed earnings of certain non-U.S. subsidiaries that were determined to be indefinitely reinvested abroad.3 The annualized return on average common equity from continuing operations was 17.1% in the current quarter, or 13.1% excluding the effect of the discrete tax benefit.
For the current quarter, net income applicable to Morgan Stanley, including discontinued operations, was $0.99 per diluted share, compared with a net loss of $0.57 per diluted share in the first quarter of 2009. Discontinued operations included a loss of $932 million on the planned disposition of Revel Entertainment Group, LLC, a subsidiary of Morgan Stanley, and a gain of $775 million related to a legal settlement with Discover Financial Services.4
Compensation expenses of $4.4 billion increased from $2.0 billion a year ago due to the inclusion of MSSB2 and higher net revenues. The Firm's compensation to net revenue ratio for the current quarter was 49%, compared with 68% a year ago. Non-compensation expenses of $2.1 billion increased from $1.5 billion a year ago due to the inclusion of MSSB2 and higher levels of business activity.
James P. Gorman, President and Chief Executive Officer, said, "Our intense focus on disciplined execution across Morgan Stanley's global franchise helped the Firm deliver improved results this quarter, though we still have a great deal of work to do. Within Institutional Securities, the build-out of our Sales and Trading business is beginning to pay off across our fixed income and equity platforms. Our client-focused investment banking franchise remains a clear industry leader – with a strong presence and deep ties around the globe – and we are working to continue broadening those client relationships. We are driving forward key strategic initiatives, including the integration of the Morgan Stanley Smith Barney joint venture, where we saw the highest levels of net new assets since the fall of 2008 and historic lows in financial advisor turnover. We also made progress in repositioning our asset management business, which delivered positive results for the quarter. Looking ahead, I remain confident that Morgan Stanley has the right mix of businesses and talent to continue serving our clients in a first-class way and deliver strong, sustainable earnings over time."
Institutional Securities reported pre-tax income from continuing operations of $2.1 billion, compared with a pre-tax loss from continuing operations of $464 million in the first quarter of last year. Net revenues were $5.3 billion, compared with $1.6 billion a year ago.1 The quarter's pre-tax margin was 39%.8
Global Wealth Management Group reported pre-tax income from continuing operations of $278 million, compared with $119 million in the first quarter of last year. Comparisons of current quarter results to prior periods were affected by the results of MSSB,2 which closed on May 31, 2009. Income after the non-controlling interest allocation to Citigroup Inc. and before taxes was $163 million.10 The quarter's pre-tax margin was 9%.8
Asset Management reported pre-tax income from continuing operations of $173 million, compared with a pre-tax loss from continuing operations of $283 million in last year's first quarter. Merchant Banking results for the current quarter included principal investment gains of $122 million in certain real estate funds included in Morgan Stanley's consolidated results.6, 7 Income after the non-controlling interest allocation and before taxes was $57 million. The quarter's pre-tax margin was 26%.8 Excluding the principal investment gains noted above, the pre-tax margin was 11%.6, 11
Total capital as of March 31, 2010 was $212.1 billion, including common equity of $38.7 billion, preferred equity and junior subordinated debt issued to capital trusts. Morgan Stanley's Tier 1 capital ratio, under Basel I, was approximately 15.0% and Tier 1 common ratio was approximately 8.2%.14
As of March 31, 2010, Morgan Stanley has not repurchased any shares of its common stock as part of its capital management share repurchase program. Book value per common share was $27.65, based on 1.4 billion shares outstanding.
Total assets were $820 billion as of March 31, 2010, up 31% from a year ago.
The effective tax rate from continuing operations for the current quarter was 17.3%. As noted previously, the results for the quarter included a tax benefit of $382 million related to the reversal of the U.S. deferred tax liabilities. Excluding this benefit, the quarter's annual effective tax rate would have been 32.5%.
Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 42 countries. For further information about Morgan Stanley, please visit www.morganstanley.com.A financial summary follows. Financial, statistical and business-related information, as well as information regarding business and segment trends, is included in the Financial Supplement. Both the earnings release and the Financial Supplement are available online in the Investor Relations section at www.morganstanley.com.
The information above contains forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management's current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see "Forward-Looking Statements" immediately preceding Part I, Item 1, "Competition" and "Supervision and Regulation" in Part I, Item 1, "Risk Factors" in Part I, Item 1A, "Legal Proceedings" in Part I, Item 3, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and "Quantitative and Qualitative Disclosures about Market Risk" in Part II, Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2009 and other items throughout the Form 10-K and the Company's Current Reports on Form 8-K.
1 As a result of the improvement in Morgan Stanley's debt-related credit spreads, sales and trading net revenue for the quarter ended March 31, 2009 included negative revenue of $1.7 billion (fixed income: $1.0 billion; equity: $0.5 billion; other: $0.2 billion).
2 MSSB results included revenues and expenses (compensation and non-compensation), related to legacy Smith Barney operations, that were incremental to the Firm's financial results subsequent to deal closing on May 31, 2009.
3 During the first quarter of 2010, as part of a periodic review of the operations and liquidity, funding and capital requirements of our non-U.S. subsidiaries, coupled with certain strategic initiatives, it was determined that the undistributed earnings of certain non-U.S. subsidiaries, for which U.S. federal income taxes had been previously provided, would be indefinitely reinvested in those subsidiaries abroad. This determination resulted in the reversal of deferred tax liabilities and the recognition of the noted tax benefit.
4 In addition to the activities noted, discontinued operations also included substantially all of the results of the retail asset management business, including Van Kampen Investments, Inc.
5 Source: Thomson Reuters – for the period of January 1, 2010 to March 31, 2010 as of April 5, 2010.
6 Results for the current quarter included principal investment gains of $122 million and pre-tax income of $116 million related to certain real estate funds included in Morgan Stanley's consolidated results.
7 The limited partnership interests in certain real estate funds consolidated by Morgan Stanley are reported in net income / (loss) applicable to non-controlling interests on page 10 of Morgan Stanley's Financial Supplement accompanying this release.
8 The pre-tax margin is a non-GAAP measure.
9 Trading and non-trading VaR for the current quarter reflected the reclassification of counterparty portfolio VaR from non-trading VaR to trading VaR. Counterparty portfolio VaR reflected adjustments, net of hedges, related to counterparty credit risk and other market risks. Aggregate trading and non-trading VaR was not affected by this change. Trading and non-trading VaR for prior quarters have not been restated. On a restated basis, however, average trading VaR for the fourth quarter of 2009 would have been $152 million.
10 Morgan Stanley owns 51% of MSSB, which is consolidated. The results related to the 49% interest retained by Citigroup Inc. are reported in the net income/(loss) applicable to non-controlling interests on page 8 of Morgan Stanley's Financial Supplement accompanying this release.
11 The pre-tax margin is calculated on a pro-forma basis and is a non-GAAP measure.
12 The Core business includes traditional, hedge funds and fund of funds asset management.
13 Gains related to Morgan Stanley's minority equity investments in certain companies are reported in other revenues.14 Effective March 31, 2009, Morgan Stanley calculated its Tier 1 capital ratio and Tier 1 common ratio in accordance with the capital adequacy standards for bank holding companies adopted by the Federal Reserve Board. These standards are based upon a framework described in the International Convergence of Capital Measurement, dated July 1988, as amended, also referred to as "Basel I." These computations are preliminary estimates as of April 21, 2010 (the date of this release) and could be subject to revision in Morgan Stanley's Quarterly Report on Form 10-Q for the quarter ended March 31, 2010.