* Q3 net loss $91 mln
* Trading slumps; wealth management revenue flat
* CEO warns of impact on industry from financial reform
* Results "very disappointing" vs competitors - analysts
* Shares down 0.5 pct in afternoon trading
(Adds details on risk-taking, updates share price, add links)
By Steve Eder
NEW YORK, Oct 20 Morgan Stanley (MS.N) reported
a surprising third-quarter loss, suggesting the bank is losing
hard-won ground in the battle with Goldman Sachs (GS.N) for
Wall Street supremacy.
The firm's $91 million loss, on weak volumes during one of
the most difficult trading quarters in recent memory, came a
day after Goldman overcame those same conditions to beat Street
estimates with a $1.9 billion profit.
Despite results that could have spooked Wall Street a few
quarters ago, Morgan Stanley shares were just fractionally
lower in afternoon trading and the broader market was higher,
the latest sign of a decoupling of banks from wider investment
"Morgan Stanley is a caterpillar in metamorphosis. It's
either going to turn into a beautiful butterfly or get eaten by
a robin," said Brad Hintz, an analyst with Sanford C.
"You could look ahead and say I'm going to like the future
Morgan better than I'm going to like the future Goldman, but
you're still going to have a period that's pretty rough on the
Take A Look [ID:nN20193796]
Graphic on MS earnings link.reuters.com/ped49p
Reuters Insider link.reuters.com/dyt29p
Breakingviews on MS stumbling behind [ID:nN20202495]
Column on trading [ID:nLDE69J1VQ]
Instant View [ID:nN19249240]
Graphic on risk-taking r.reuters.com/jyg49p
Graphic FICC trading link.reuters.com/vyk49p
Morgan Stanley restructures FrontPoint [ID:nN20212023]
The leading investment banks have gone in different
directions since the financial crisis: Morgan Stanley has
rebalanced its business to include the largest retail
brokerage, while Goldman has stuck to its banking and trading
Morgan Stanley Chief Executive James Gorman acknowledged on
Wednesday that the bank remains a "work-in-progress" -- and
warned investors to expect more growing pains due to the
financial reform law that restricts proprietary trading and
hedge fund ownership by banks.
"The regulatory changes are real, permanent and will
fundamentally reshape the industry," Gorman said on a
conference call with investors and analysts.
The bank said on Wednesday that, as expected, it was
restructuring its ownership of hedge fund unit FrontPoint
Partners LLC, in part to comply with the reform law's "Volcker
rule" on hedge fund assets. Morgan Stanley will retain a
minority ownership in FrontPoint.
Morgan Stanley knows it has work to do to catch up to
Goldman in fixed income trading, which powered the banking
industry's rebound from the financial crisis. Its third-quarter
fixed income net revenue was down by more than half from a year
The firm's "results are very disappointing -- the worst so
far in the investment banking sector," analysts at JPMorgan
wrote in a report.
Morgan Stanley Chief Financial Officer Ruth Porat said the
bank's efforts to rebuild its fixed income trading ranks have
further to go, and it remains outnumbered by its peers.
"We have repeatedly said that fixed income is the area we
need to build up," Porat told Reuters in an interview.
She said third-quarter results were hurt by the accounting
ramifications of improvements in the bank's debt prices, but
added that the trading results "were nothing to be proud
Porat said Morgan Stanley's trading desks struggled in a
tough environment in which it already had lower market share
than some of its rivals.
Morgan Stanley, based on one measure, boosted its
risk-taking in the third quarter, even as rivals like Goldman
reined in risk.
Morgan Stanley's average "value-at-risk" -- a measure of
the maximum possible losses the bank will face on 95 percent of
its trading days -- was $142 million in the third quarter, up
from $139 million in the second quarter. Goldman reported a VaR
of $121 million, down from $136 million in the second quarter.
Under Gorman, who took over as CEO on Jan. 1, Morgan
Stanley has been focused on building the Morgan Stanley Smith
Barney joint venture, the largest retail brokerage. The bank
spent $83 million on integrating the joint venture during the
third quarter, Porat said during the conference call.
The bank's global wealth management business did not offer
much relief from the trading woes in the third quarter,
reporting net revenues of $3.1 billion, up just 1 percent from
a year earlier. Morgan Stanley said lower levels of client
activity weighed on its retail brokerage results.
Porat said Morgan Stanley is still confident the wealth
business will help balance the firm's operations.
"We still see multiple legs of the stool working together
to create a more balanced business," she told Reuters.
Morgan Stanley's strategy of building its wealth business
was also designed to help the firm prepare for the financial
reform law's more stringent regulations on trading.
The bank reported a third-quarter net loss applicable to
shareholders of $91 million, compared with a profit of $498
million a year earlier. (For a table of Morgan Stanley results,
Income from continuing operations was 5 cents a share.
Analysts' average forecast was 15 cents, according to Thomson
Morgan Stanley said its results reflected a writedown of
$229 million related to Revel Entertainment Group, a troubled
hotel and casino project in Atlantic City, New Jersey.
The bank's shares were down 13 cents, or 0.5 percent, to
$25.26 in afternoon trading.
(Reporting by Steve Eder; additional reporting by Maria Aspan;
editing by John Wallace)