Morgan Stanley (MS) reported a slightly weak Q2 this morning, missing revenue estimates but beating on EPS thanks to one-time gains. Profits were down 60% year-over-year, but the quarter wasn’t nearly as bad as it could have been given the slow-motion trainwrecks that have unfolded at some of the other big financial firms.
MS will be hosting a conference call at 11:00 Eastern, and we’ll be covering it live below. CEO and Chairman John Mack will have a complex juggling act on his hands as he tries to both assure investors of the strength of Morgan’s balance sheet and convince analysts that Morgan has been, and will continue to be, fully transparent.
Conference Call Notes
10:57: Hold music playing… awaiting call.
11:01: Call begins, usual introductions and disclaimers about forward looking statements.
11:03: Strong client flows characterised first quarter, second quarter “severely disrupted by Bear Stearns Situation.” Client activity improved in March, but remained “subdued.” Few attractive investment opportunities, “continue to be prudent in our use of capital.”
11:05: “Theme of deleveraging continue.” “Strength of our balance sheet will be evident when we disclose our tier 1 ratio in 10-Q. “We feel we have navigated through this difficult quarter.”
11:08: Several businesses “performed well,” including prime brokerage, cash equity trading, and foreign exchange.
11:10: Headcount decreased 4% reflecting desire to “resize” several businesses.
11:12: Institutional Securities business significantly affected by ongoing market challenges and decrease in client activity. Revenues down 54%.
11:13: Investment Banking revenue down 11%, but pipeline remains “healthy.”
11:14: Total sales and trading revenues down 61%. Illiquid credit markets and lower client activity drove down results.
11:15: Credit trading generated a loss of $390 million. Commodities business declined on poor positioning in North American electricity.
11:16: Leveraged lending, commercial real estate, and residual sub-prime exposure have all decreased. Leveraged acquisition portfolio down to $12.7 from $35 billion in Q1. $910 million loss on hedges, mostly in leveraged acquisition portfolio .
11:20: Reduced subprime exposure to $300 million from $1.8 billion… have “optimised” subprime exposure by shifting to higher quality positions. Exposure to Alta-A and European mortgage loans down to $6.7 billion from $8.7 billion. Hedges in this sector have netted $300 million. Lost $390 million on monolines.
11:22: Comitted to “strong capital position, high levels of liquidity, and prudent leverage ratios.” “Continue to be well capitalised.”
11:24: Tier 1 ratio to be between 11.5% and 12%… “this represents overall strength of our balance sheet.”
11:28: Liquidity up $46 billion to $169 billion.
11:30: “We are managing our balance sheet prudently.” Our total leverage ratio has decreased from 27.4x to 25.1. Position Morgan to take advantage of market opportunities.
11:32: Commercial paper outstanding down to $12.3 billion.
11:35: Total Client assets up 2% to $739 billion.
11:37: Asset Management business “negatively impacted by market turmoil.” Pre-tax loss of $227 million and revenue down 10%.
11:40: Sotal SIV exposure down to $1.3 from $3.6 billion.
11:41: Total assets under management increased 5% to record $605 billion.
11:42: 57% of revenue was international. 14% from Asia, 43% from Europe and the Middle East.
11:43: Outlook: After difficult start, Normal flows returned in May, and have continued through June. Concerns remain over ongoing housing downturn, inflation, higher energy prices, higher unemployment. US consumer will be pressured. Uncertainty over regulatory and accounting changes. See more risk-taking activity… positive signs. Retail clients “remain engaged.”
11:46: Q&A begins… Merrill analyst asks about leveraged-finance hedge loss, colour on types of hedges… answer… had hedge losses over whole book. difficult to manage the ideosyncratic risk.
11:50: Lehman analyst asks about changes in risk management, how fully has it been implemented? Answer: Losses related to legacy positions, not reflective of current attitude towards risk. Sometimes well-reasoned bets go wrong… but we get more bets right than we get wrong. “Balance sheet in good order, and we understand our risks.”
11:57: Goldman analyst asks about $120 million loss from mis-marking trader in London. Answer… Controls picked it up. It’s not material, and was isolated but we wanted to disclose it.
12:08: UBS analyst asks about Morgan Stanley’s loss of market share… Answer… pipeline is “healthy”… it’s a timing element and temporary distortion. “Will regain our rankings.”
12:10: Deutsche Bank analyst asks about I-bank pipeline… Answer… It’s difficult to give specifics. “That’s all I wanna say.”
12:17: Citi analyst asks about attitude to environment… Will MS be agressive in deploying capital… Answer… There will be opportunity to make money and take advantage of dislocation. Outlook not as rosy as last quarter’s. “Didn’t feel that, on a risk-adjusted basis it was worth taking bets away from areas we were comfortable with.” “We’ve reduce balance sheet, waiting for right risk-adjusted opportunity to come along.”
12:20: Bank of America analyst asks where level 3 assets ended… Answer… Still too early, wait for the 10-Q.
12:25: Call ends.