Morgan Stanley sees revenue growth slowing in 2008

NEW YORK (Reuters) - Morgan Stanley (MS.N) expects revenue and common equity growth to slow next year amid a more challenging environment, the company's chief financial officer said at a conference on Tuesday.

The world's second-largest securities firm disclosed last week that it suffered $3.7 billion of losses on proprietary mortgage market trades, and warned that it might mark assets down further if markets continued to weaken.

"While we expect 2008 to be another growth year, we do not expect the current growth trajectory in revenue and average common equity to continue," CFO Colm Kelleher said at the Merrill Lynch Banking and Financial Services conference.

While Morgan's outlook was cautious, upbeat comments by rivals Goldman Sachs Group Inc (GS.N) and Bank of America Corp (BAC.N) earlier on Tuesday helped buoy most financial stocks. Morgan shares rose $2.09, or 3.9 percent, to close at $55.63.

Morgan Stanley's revenue in the first nine months grew 29 percent versus the prior year, while common equity rose 22 percent. The growth partly reflected the bank's shift from agency businesses to principal activities, Kelleher said.

But weakness in credit markets, and the bank's plans to shrink its balance sheet, means those growth trends will slow.

Total assets at the bank have risen 17 percent a year since 2004, but that growth has left Morgan with the highest leverage ratio among its peers at 32 times shareholder equity.

Looking ahead, Kelleher said the company will reduce some holdings and redirect capital to more lucrative areas such as emerging markets, commodities, wealth management and asset management.

"We plan to be more judicious in how we allocate capital, to ensure the highest risk-return in this environment," he said. Morgan intends to "bring down" its balance sheet to keep leverage levels on par with previous quarter, he said.

Yet midway though November, the outlook for credit markets remains dim. Kelleher expects "the market to take longer, several quarters, to return to more normal operating levels."

Meanwhile demand for collateralized debt obligations will remain weak, hobbling structured finance "for an extended period," he said.

GROWTH PLANS

Outside of debt trading, Morgan's investment banking, equities and wealth management businesses are holding up well. And it continues to expand businesses ranging from alternative investments and derivatives, to private equity, leveraged finance and prime brokerage.

Kelleher said Morgan wants to acquire a private bank that will cater to ultra-wealthy individuals, part of a broader wealth management push funded in part by Morgan's sale of its UK brokerage unit, Quilter Holdings.

"Our private banking business is key to the growth of our global offshore private wealth management business," Kelleher said. "We will consider acquiring a private bank if the opportunity presents itself at the right price."

Morgan also has been active building a physical presence in emerging markets, such as getting a broker-dealer license in Mexico, and it is creating Morgan Stanley Bank International (China) out of a small Chinese bank, Nan Tung Bank.

Other new target markets for the firm include Turkey, Dubai, Qatar, Saudi Arabia, Kazakhstan and Central Europe, Kelleher said. The bank also is aggressively building up a number of businesses in Taiwan, Korea and Australia.

Morgan Co-President Zoe Cruz, recently tagged as CEO John Mack's heir apparent, attended the Manhattan conference but did not speak because she was suffering from bronchitis.

(Additional reporting by Dan Wilchins; Editing by Leslie Gevirtz and Braden Reddall)