By David Henry and Lauren Tara LaCapra
July 19 Morgan Stanley reckons the retail brokerage business it jointly owns with Citigroup Inc is worth less than half as much as Citigroup believes, Citi said in a filing on Thursday with the Securities and Exchange Commission.
Citigroup and Morgan Stanley exchanged appraisals of the joint venture because Morgan Stanley plans to buy an additional 14 percent share of the brokerage. Morgan Stanley currently owns 51 percent of the business known as Morgan Stanley Smith Barney, by some measures the largest U.S. retail brokerage.
Citigroup said its appraisal "slightly exceeded" its own carrying value of approximately $11 billion for its 49 percent stake.
To set a final price for the 14 percent stake, the two sides will use a third-party appraisal process that will conclude at the end of August, Citigroup said.
The outcome could result in a "significant" charge to Citigroup net income in the third quarter, the filing noted, adding that any impairment would not impact the bank's Basel III regulatory capital position or its cash holdings.
A Morgan Stanley spokes woman declined to comment on the appraisal.
The joint venture was created in 2009, c o m ing out of the financial crisis as Citigroup, which was badly crippled by losses on mortgage-related securities, set out to shrink its balance sheet, partly by selling its Smith Barney brokerage.
Since then , the value of brokerage assets has waxed and waned with customer sentiment about Wall Street and the outlook for investment returns.
The Morgan Stanley Smith Barney business has not been performing as well as initially projected by Morgan Stanley due to weak client trading activity and the cost of combining the brokerages.
Morgan Stanley now aims for its wealth management operations, which are mainly comprised of its stake in Morgan Stanley Smith Barney, to earn pre-tax profits that are in the mid-teens as a percentage of revenue by the middle of next year -- bel o w the 20 percent goal originally set by Chie f Executive James Gorman.
For Morgan Stanley, buying more of the venture is part of a strategy to emphasize the stability of wealth management revenue streams over the volatility of investment banking.
Morgan Stanley has options to buy the rest of the venture through 2014.
Citi called its valuation of the venture "reasonable and supportable, " adding i t expects to close the sale of the 14 percent stake to Morgan Stanley by Sept. 7 .