NEW YORK (Reuters) - Morgan Stanley (MS.N) is expected next week to announce its second quarterly loss in the past year, fueled by sinking revenues and plunging asset values, but investors are still looking for signs the hard-hit bank can recover from a deepening credit crunch.
One of the most dreadful years on Wall Street was punctuated by one of the worst quarters ever, forcing analysts to slash expectations for Morgan Stanley and Goldman Sachs Group Inc (GS.N). Falling stock and debt asset prices has meant massive write-downs on top of dwindling investment banking and trading revenues.
Analysts expect Morgan Stanley to report a loss for the November quarter as high as $1.15 a share, or nearly $900 million, next Wednesday. The average expectation is for a loss of 27 cents, or $183 million, according to Reuters Estimates.
That compared favorably to Goldman, which is seen reporting its first-ever loss Tuesday, with expectations as high as $6 a share, or $2.4 billion. Goldman is the most aggressive bank in risking its own capital in private equity and principal investments, which have suffered along with the market.
For the second time in the past four quarters, Morgan Stanley is expected to be in the red, detracting from some progress it has made since mortgage trading losses led to a $3.6 billion loss in the year-ago period.
Still, according to analysts, the bottom line is that everything is down — even the number of employees promoted to managing director.
On Wednesday, Morgan announced the appointment of 133 new managing directors this year, down from 241 named last year and 228 the year before that.
Morgan Stanley will post $4.3 billion in private equity losses and fixed-income write-downs, partly offset by an accounting gain from the falling value of its debt, according to Fox-Pitt, Kelton analyst David Trone.
“Asset pricing is likely to push Morgan Stanley back into the red for the second time during the credit bust,” said Trone, adding the company would have been profitable without the write-downs “despite a lousy environment.”
Trone referred to the falling value of assets owned by the company as well as a drop in revenues from a slowdown in selling various securities.
A deep freeze in debt markets has slowed banking activity to a crawl, while capital constraints and pressure to slash leverage are expected to squeeze trading results.
Analysts looked for a 16 percent drop in revenue from an already-weak third quarter. Fixed-income trading, Wall Street’s profit engine for a decade, should fall 3 percent amid continued weakness in corporate debt markets.
Equity trading revenue is seen falling about 15 percent, reflecting the enormous loss of clients from Morgan Stanley’s prime brokerage unit during the depths of the financial crisis in September.
“Just about every market that Morgan Stanley services did poorly,” Ladenburg Thalmann & Co analyst Richard Bove said.
Meanwhile its brokerage and asset management business, which had turned around since Mack arrived in 2005, were also expected to lose ground from the August period.
its shares have stabilized since the middle of September, when investors and clients pushed Lehman Brothers Holdings Inc LEHMQ.PK into bankruptcy and investors lost confidence in Wall Street’s highly leveraged broker-dealer model.
Chief Executive John Mack secured $19 billion in new capital from Mitsubishi UFJ Financial Group Inc (8306.T) and the U.S. Treasury Department, continued to pare down the balance sheet and converted to a bank with plans to amass consumer deposits.
“On pure fundamentals, Morgan Stanley should survive — and likely thrive eventually,” Trone said. However, “it may be premature to say the episode is over.”
Mack set the tone on Monday, when he told employees the bonus pool will be “dramatically” lower this year and that senior management would receive no bonuses, citing lower revenue and market conditions that were not likely to improve soon.
“I am sure that the market volatility we’ve seen this fall will continue in the months ahead,” Mack said in the memo.
Editing by Jeffrey Benkoe