|Morgan Stanley Reports Third Quarter 2010:|
For a printable copy, click here.
NEW YORK, October 20, 2010 – Morgan Stanley (NYSE: MS) today reported income of $313 million, or $0.05 per diluted share,1 from continuing operations applicable to Morgan Stanley for the quarter ended September 30, 2010 compared with income of $936 million, or $0.50 per diluted share, for the same period a year ago. Net revenues were $6.8 billion for the current quarter compared with $8.5 billion a year ago. Net revenues in the current quarter included negative revenue of $731 million related to Morgan Stanley's debt-related credit spreads (DVA)2, 3 compared with negative revenue from DVA of $878 million in the prior year's third quarter. The results for the quarter also included $176 million, or $0.12 per diluted share, associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated.
For the quarter, the net loss applicable to Morgan Stanley, including discontinued operations, was $0.07 per diluted share, compared with net income of $0.38 per diluted share in the third quarter of 2009, reflecting a loss of $229 million due to a write-down and related costs associated with the planned disposition of Revel Entertainment Group, LLC.4
Compensation expenses of $3.7 billion decreased from $4.9 billion a year ago. The decline primarily reflected lower compensation costs in Institutional Securities. The Firm's compensation to net revenue ratio for the current quarter was 54% compared with 58% a year ago. These ratios were higher as a result of negative DVA, which reduced net revenues in both periods. Non-compensation expenses of $2.3 billion increased from $2.1 billion a year ago, primarily due to ongoing investments in technology.
Separately, the Firm announced today a restructuring of its ownership of FrontPoint Partners LLC (FrontPoint) whereby FrontPoint senior management and portfolio managers will own a majority equity stake in FrontPoint and Morgan Stanley will retain a minority stake. FrontPoint will replace Morgan Stanley affiliates as the investment advisor and general partner of the FrontPoint funds. The restructuring is expected to close in the fourth quarter of 2010.
Third Quarter Business Highlights
James P. Gorman, President and Chief Executive Officer, said, "Although we continued to make progress across some key businesses this quarter, our results in aggregate clearly do not reflect the true potential of Morgan Stanley's global client franchise and I am not satisfied with our overall performance. Our Sales and Trading business was clearly muted; however, we delivered broad-based strength in Investment Banking and improved performance - and positive flows - in both Wealth Management and Asset Management. We continue to invest in our people and our platform, and we are executing our client-focused strategy, including the plans we announced today regarding our FrontPoint business. While we still have considerable work to do across the Firm, Morgan Stanley's client franchise remains well positioned to benefit as the environment stabilizes and investors return to the market."
Institutional Securities reported pre-tax income from continuing operations of $240 million compared with pre-tax income from continuing operations of $1.3 billion in the third quarter of last year. Net revenues were $2.9 billion compared with $5.0 billion a year ago.3
Global Wealth Management Group reported pre-tax income from continuing operations of $281 million compared with pre-tax income from continuing operations of $280 million in the third quarter of last year. The quarter's pre-tax margin was 9%.8 Income after the non-controlling interest allocation to Citigroup Inc. and before taxes was $237 million.9
Asset Management reported pre-tax income from continuing operations of $279 million compared with a pre-tax loss from continuing operations of $124 million in last year's third quarter. Results for the current quarter included gains of $203 million and pre-tax income of $195 million in Merchant Banking related to principal investments held by certain consolidated real estate funds.6 The quarter's pre-tax margin was 35%.8 Income after the non-controlling interest allocation and before taxes was $86 million.
Morgan Stanley's Tier 1 capital ratio, under Basel I, was approximately 16.5% and Tier 1 common ratio was approximately 10.8%.8, 11
As of September 30, 2010, Morgan Stanley had not repurchased any shares of its common stock as part of its capital management share repurchase program.Book value per common share was $31.25, based on 1.5 billion shares outstanding. Book value included a benefit of $1.40 per share due to the mandatory conversion of $5.6 billion of equity units into 116 million shares of common stock during the quarter.
As noted above, the results for the quarter included a discrete tax gain of $176 million. Excluding this discrete tax gain, the effective tax rate from continuing operations for the quarter was 19.1%.
Morgan Stanley announced that its Board of Directors declared a $0.05 quarterly dividend per common share. The dividend is payable on November 15, 2010 to common shareholders of record on October 29, 2010.
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, the Company's Quarterly Reports on Form 10-Q and the Company's Current Reports on Form 8-K.
1 Includes preferred dividends and related adjustments of approximately $239 million for the quarter ended September 30, 2010 and $281 million for the quarter ended September 30, 2009.
2 Represents the changes in Morgan Stanley’s credit spreads resulting from fluctuation in the fair value of certain of its long-term and short-term borrowings (commonly referred to as “DVA”).
3 Due to DVA, sales and trading net revenue for the quarter ended September 30, 2010 included negative revenue of $731 million (fixed income: $464 million; equity: $196 million; other: $71 million) and sales and trading net revenue for the quarter ended September 30, 2009 included negative revenue of $878 million (fixed income: $546 million; equity: $206 million; other: $126 million).
4 The charge of $229 million in the current quarter includes a reduction in the carrying value in the Firm’s investment in Revel Entertainment Group, LLC from approximately $240 million to $40 million.
5 Source: Thomson Reuters – for the period of January 1, 2010 to September 30, 2010 as of October 4, 2010.
6 The limited partnership interests in these funds are reported in net income / (loss) applicable to non-controlling interests on page 10 of Morgan Stanley’s Financial Supplement accompanying this release.
7 Results for the current quarter included gains of $313 million on a principal investment held by a consolidated investment partnership. Approximately $180 million of this gain related to third party investors was recorded in the net income / (loss) applicable to non-controlling interests on page 5 of Morgan Stanley’s Financial Supplement accompanying this release.
8 Pre-tax margin and Tier 1 common ratios are non-GAAP financial measures that the Firm considers to be useful measures that the Firm and investors use to assess operating performance and capital adequacy, respectively. Pre-tax margin represents income or loss from continuing operations before taxes, divided by net revenues. The Tier 1 common ratio equals Tier 1 capital (see note 11) less qualifying perpetual preferred stock, qualifying trust preferred securities and qualifying restricted core capital elements, adjusted for the portion of goodwill and non-servicing intangible assets associated with Morgan Stanley Smith Barney’s (MSSB) non-controlling interests divided by risk-weighted assets.
9 Morgan Stanley owns 51% of MSSB, which is consolidated. The results related to the 49% interest retained by Citigroup Inc. are reported in net income / (loss) applicable to non-controlling interests on page 8 of Morgan Stanley’s Financial Supplement accompanying this release.
10 The Core business includes traditional, hedge funds and fund of funds asset management.
11 The Firm calculates its Tier 1 capital ratio and risk-weighted assets in accordance with the capital adequacy standards for financial holding companies adopted by the Federal Reserve Board. These standards are based upon a framework described in the International Convergence of Capital Measurement and Capital Standards, July 1988, as amended, also referred to as Basel I. These computations are preliminary estimates as of October 20, 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 September 30, 2010.