Morgan Stanley sees $2.5 billion subprime profit hit

NEW YORK (Reuters) - Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) on Wednesday said it expects fourth-quarter earnings to be reduced by about $2.5 billion from a write-down of its U.S. subprime exposure.

The Wall Street investment bank said revenue has been reduced by $3.7 billion for the two months ended October 31 because of the write-down. It said the amount may change this month, when it completes its fiscal year.

Morgan Stanley joins a growing list of financial companies, including Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch & Co (MER.N: Quote, Profile, Research, Stock Buzz), to report large write-downs related to exposure to subprime, or lower quality, debt. Those three companies have in the last four weeks announced about $24 billion of write-downs.

Shares of Morgan Stanley nevertheless rose after the company disclosed the loss following the U.S. market close.

Some observers had expected a larger write-down. Fox-Pitt Kelton's David Trone on Tuesday said Morgan Stanley might face a $6 billion debt write-down.

Morgan Stanley said it had reduced its net exposure to U.S. subprime debt -- defined as the potential loss if all of the debt's value was wiped out -- to $6 billion as of October 31 from $10.4 billion as of August 31.

Analysts on average expected Morgan Stanley to report a fourth-quarter profit of $1.83 per share on revenue of $8.83 billion, according to Reuters Estimates.

Morgan Stanley shares closed down $3.32, or 6.1 percent, to $51.19 in Wednesday trading. They rose as high as $53.50 after-hours, before falling back to $51.95.

(Reporting by Jonathan Stempel)