(Adds background, updates share price)
* Q1 profit lower excluding accounting adjustment
* Fixed-income, commodity trading revs drop on adj basis
* Adj shr $0.61 vs Street view 0.57
* Wealth management revenue rises 5.4 percent
* Shares down 4.9 pct in afternoon
(Adds detail on fixed-income and competitors, updates share
By Lauren Tara LaCapra and Tanya Agrawal
April 18 Morgan Stanley posted a 14
percent drop in adjusted earnings as its bond trading unit
faltered in the first quarter, raising fresh questions about how
quickly the bank can turn around the long-lagging business.
The results put more pressure on Chief Executive James
Gorman, who has been building Morgan Stanley's wealth management
arm and reducing assets on its trading books. He is trying to
make the bank's profits durable even during economic downturns,
but some investors fear his efforts are weakening Morgan
Stanley's investment bank too much.
The bank's shares fell 4.9 percent to $20.41 in afternoon
Investors are starting to "realize that the new business
model looks more utility-like than it does big, sexy bank-like,"
said Douglas Ciocca, CEO of Kavar Capital Partners, which
manages $270 million in client money.
"It's a mind shift from the investor perspective," he said.
"At one time, banks like Morgan Stanley had gained outsized
profit from risky trading businesses."
Morgan Stanley's first-quarter bond and commodity trading
revenue fell by about 40 percent to $1.5 billion, excluding
adjustments for changes in the value of the bank's debt. The
results lagged peers like Goldman Sachs Group Inc and
JPMorgan Chase & Co, whose fixed-income trading revenue
declines were shallower. Banks this week broadly posted weaker
revenue as the industry struggles with low interest rates, weak
loan demand, and other headwinds.
Chief Financial Officer Ruth Porat blamed Morgan Stanley's
fixed-income trading decline on a slowdown in interest-rate
products and commodities, as well as a sharp drop in overall
market activity in March.
Some of the business's issues are cyclical, particularly in
commodities, and areas like credit, mortgages and foreign
exchange will help pick up the slack in the future, Porat said.
"We don't think $1.5 billion in revenue is a ceiling," said
Wealth management revenue rose 5.4 percent to $3.47 billion,
the highest in the firm's history. Profit generated by the unit
jumped 29 percent to $255 million. The unit represented about 41
percent of the total revenue generated by the No. 6 U.S. bank by
"What we are trying to do is get this firm back on the
rails, which we've done over the last couple of years on a very
deliberate path," Gorman said during a conference call. "We
believe we are now well on that path."
Even so, total revenue, excluding accounting adjustments,
fell 4.8 percent from a year earlier to $8.48 billion. The
bank's income from continuing operations excluding adjustments
fell about to $1.2 billion from $1.4 billion.
Gorman views wealth management as a stabilizing anchor for
Morgan Stanley, to help offset volatility in the bank's trading
business, once a foundation of its franchise.
Morgan Stanley's revenue from wealth management grew to
$13.5 billion last year from $5.5 billion a year before the
In the first quarter, the unit's pretax profit margin held
firm at 17 percent, compared with 11 percent a year earlier.
Gorman had promised margins in the mid-teens by June, after
initially aiming for 20 percent.
The wealth management profit of $255 million excludes $121
million that was returned to Citigroup for its ownership
stake in the unit. Morgan Stanley, which bought a majority stake
in Citi's Smith Barney unit in January 2009, plans to buy the
remaining 35 percent by year-end, Gorman said.
Morgan Stanley is looking to dispose of non-strategic
commodity and fixed income businesses, and said on Thursday its
efforts to that end were "on schedule."
Other areas of the institutional securities business, which
includes merger advisory, stock and debt underwriting and
trading, also lagged. Revenue excluding certain accounting
adjustments for the division dropped to $4.41 billion from $5.11
billion a year earlier.
All told, Morgan Stanley's net income in the three months to
the end of March amounted to $958 million, or 49 cents a share,
compared with a year-earlier loss of $119 million, or 6 cents.
The bank's profit fell last year after it took an accounting
hit for changes in the value of debt it issued, known as the
debt valuation adjustment. This year, the adjustment boosted
Excluding those adjustments, income from continuing
operations in the latest quarter was 61 cents a share. On that
basis, analysts had expected 57 cents.
Expenses, including compensation, fell to $6.54 billion from
$6.72 billion a year earlier quarter but were up from $6.11
billion in the 2012 fourth quarter. Compensation expense slipped
to $4.2 billion from $4.4 billion a year earlier.
Record earnings from wealth management came not just from a
pickup in stock and bond market values, but from higher
transaction revenue, Porat said in an interview.
Higher closed-end fund issuance also helped as firms tapped
retail investors for new funds in equities and high-yield debt,
"It really highlights the operating leverage in this
business because it's not as though the markets have a robust
new issue environment, and yet you see the impact on
profitability," she said.
(Reporting By Lauren Tara LaCapra in New York and Tanya Agrawal
in Bangalore; Writing by Frank McGurty; Editing by Supriya
Kurane and John Wallace)