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Morgan Stanley Smith Barney results flat: Citigroup

NEW YORK (Reuters) - Citigroup Inc C.N, 49 percent owner in brokerage Morgan Stanley Smith Barney, told investors on Monday that the joint venture's third-quarter results were "comparable" with those of the second quarter, reflecting "weakness across the industry."

That comment, Chief Financial Officer John Gerspach’s only remark on the venture, does not bode well for Morgan Stanley.

“In other words: not good,” said Sanford C. Bernstein banking and brokerage analyst Brad Hintz. “Retail investors continue to shun the equity market.”

Individual investors are pouring their money into bond funds, seeking some yield, and steering clear of stocks because of doubts about the economy, Hintz said. Trading volumes remain muted, forcing brokers to pursue new sources of revenue, namely the sales of loans and banking accounts.

“And banking products pay enough to keep the lights on and the heat on in the building,” Hintz joked.

Citi said the joint venture’s balance sheet assets fell by $1 billion during the past year to $26 billion on September 30. Beyond that, Citi disclosed very little information about the largest U.S. brokerage.

Joint venture partner and controlling owner Morgan Stanley MS.N reports its results on Wednesday, where wealth management has a much bigger impact on the bottom line.

A DISAPPOINTING QUARTER

Morgan Stanley’s second quarter was marred by $5.5 billion of net client withdrawals. Withdrawals were particularly large in the United States, where $7.9 billion headed for the exits.

Morgan Stanley’s wealth division, which gets small contributions from other businesses, posted a second-quarter profit of $110 million, an 11 percent increase from the first quarter. Net revenue was little changed at $3.1 billion, but pretax profit margin narrowed to 7 percent, well below the company’s goal of 20 percent.

Citi in June last year swapped Smith Barney and other brokerage businesses for a 49 percent stake in the joint venture plus $2.75 billion of cash.

Morgan Stanley Smith Barney is one of many assets that Citigroup intends to sell off to create a stronger company.

By the terms of the joint venture, Morgan Stanley will increase its ownership after three years, or June 2012, though Citi will retain a “significant stake” through at least 2014.

There is occasional speculation in the market that Morgan Stanley wants to accelerate its purchases to gain a larger share of the profit generated by the venture.

CFO Gerspach on Monday told analysts that Citigroup is looking at its assets, including the brokerage venture, and noted the continued sale of assets will improve Citigroup’s capital ratios. He did not discuss the timing of these sales.

“We clearly are looking at the minority interests that we have. The single largest component of those ... is our investment in the Morgan Stanley Smith Barney joint venture,” he said. “That has a natural exit built into the contractual arrangement that we have.”

Editing by Gerald E. McCormick and Robert MacMillan

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