Morgan Stanley Smashes Expectations And Shares Are Surging

Morgan Stanley

Morgan Stanley smashed earnings expectations for the third quarter.
The bank reported adjusted earnings per share of 77 cents.

Analysts had expected Morgan Stanley to report adjusted EPS of 54 cents.

Revenue for the third quarter came in at $US8.9 billion, beating expectations by analysts of $US8.16 billion.

Morgan Stanley’s stock was trading up about 5.7% in the pre-market.

“Morgan Stanley has delivered another quarter of earnings growth and strong performance based on consistent execution for our clients,” Morgan Stanley CEO James Gorman said in the release. “We are well positioned to create superior returns for our shareholders, particularly as the US economy continues to strengthen.”

Here’s the release:

  • Net Revenues of $US8.9 Billion and Earnings per Diluted Share from Continuing Operations of $US0.84
  • Excluding DVA,1Net Revenues were $US8.7 Billion and Earnings per Diluted Share from Continuing Operations of $US0.77
  • Strong Performance in Wealth Management with Pre-Tax Margin of 22%; Record Revenue per Financial Advisor
  • Investment Banking Ranked #1 in Global IPOs and #2 in Global Announced M&A; Continued Strength in Equity Sales & Trading

Morgan Stanley (MS) today reported net revenues of $US8.9 billion for the third quarter ended September 30, 2014 compared with $US8.0 billion a year ago. For the current quarter, income from continuing operations applicable to Morgan Stanley was $US1.7 billion, or $US0.84 per diluted share, compared with income of $US889 million, or $US0.44 per diluted share,for the same period a year ago. The current quarter included a net discrete tax benefit of $US237 million or $US0.12 per diluted share.

Results for the current quarter included positive revenues related to the change in the fair value of certain of the Firm’s long-term and short-term borrowings resulting from the fluctuation in the Firm’s credit spreads and other credit factors (Debt Valuation Adjustment, DVA) of $US215 million, compared with negative revenues of $US171 million a year ago.

Excluding DVA, net revenues for the current quarter were $US8.7 billion compared with $US8.1 billion a year ago.Income from continuing operations applicable to Morgan Stanley was $US1.6 billion, or $US0.77 per diluted share, compared with income of $US1.0 billion, or $US0.50 per diluted share, a year ago.

Compensation expense of $US4.2 billion increased from $US4.0 billion a year ago primarily driven by higher revenues. Non-compensation expenses of $US2.4 billion decreased from $US2.6 billion a year ago primarily reflecting lower litigation costs.

For the current quarter, net income applicable to Morgan Stanley, including discontinued operations, was $US1.7 billion or $US0.84 per diluted share, compared with net income of $US906 million or $US0.45 per diluted share in the third quarter of 2013.

Summary of Firm Results

(dollars in millions)

As Reported

Excluding DVA8

Net MS Income Net MS Income
Revenues Cont. Ops. Revenues Cont. Ops.
3Q 2014 $US8,907 $US1,718 $US8,692 $US1,581
2Q 2014 $US8,608 $US1,900 $US8,521 $US1,839
3Q 2013 $US7,950 $US889 $US8,121 $US1,010

Business Overview

  • Institutional Securities net revenues excluding DVA were $US4.3 billion reflecting continued strength in Investment Banking and Equity sales and trading and improved results in Fixed Income and Commodities sales and trading.
  • Wealth Management net revenues were $US3.8 billion and pre-tax margin was 22%. Fee based asset flows for the quarter were $US6.5 billion, with total client assets above $US2.0 trillion at quarter end.
  • Investment Management reported net revenues of $US655 million with assets under management or supervision of $US398 billion.

James P. Gorman, Chairman and Chief Executive Officer, said, “Morgan Stanley has delivered another quarter of earnings growth and strong performance based on consistent execution for our clients. We are well positioned to create superior returns for our shareholders, particularly as the U.S. economy continues to strengthen.”

Summary of Institutional Securities Results (dollars in millions)

As Reported

Excluding DVA9

Net Pre-Tax Net Pre-Tax
Revenues Income Revenues Income
3Q 2014 $US4,516 $US1,225 $US4,301 $US1,010
2Q 2014 $US4,248 $US961 $US4,161 $US874
3Q 2013 $US3,704 $US396 $US3,875 $US567

INSTITUTIONAL SECURITIES

Institutional Securities reported pre-tax income from continuing operations of $US1.2 billion compared with $US396 million in the third quarter of last year. The quarter’s pre-tax margin was 27% (excluding DVA, 23%). Income after the noncontrolling interest allocation and before taxes was $US1.2 billion. Net revenues for the current quarter were $US4.5 billion compared with $US3.7 billion a year ago. DVA resulted in positive revenues of $US215 million in the current quarter compared with negative revenues of $US171 million a year ago. Excluding DVA, net revenues for the current quarter of $US4.3 billion compared with $US3.9 billion a year ago. The following discussion for sales and trading excludes DVA.

  • Advisory revenues of $US392 million increased from $US275 million a year ago on higher levels of completed M&A activity. Equity underwriting revenues of $US464 million increased from $US236 million a year ago reflecting higher IPO volumes. Fixed income underwriting revenues of $US484 million were relatively unchanged from the prior year quarter, continuing to reflect a favourable debt underwriting environment.
  • Equity sales and trading net revenues of $US1.8 billion increased from $US1.7 billion a year ago reflecting strong performance in prime brokerage, partly offset by lower revenues in derivatives.
  • Fixed Income & Commodities sales and trading net revenues of $US997 million increased from $US835 million a year ago. Results reflected higher revenues in foreign exchange and securitized products, partly offset by lower results in commodities and credit products.
  • Other sales and trading net losses of $US84 million compared with a net loss of $US158 million a year ago reflecting lower costs related to the Firm’s long-term debt and higher corporate lending and commitment revenues, partly offset by losses related to investments in the Firm’s deferred compensation plans.
  • Investment revenues were $US39 million compared with $US337 million in the third quarter of last year. Results for the prior year period reflected a gain resulting from the disposition of an investment in an insurance broker.
  • Other revenues of $US225 million increased from $US159 million a year ago reflecting gains related to the sale of TransMontaigne Inc. and a retail property space, partly offset by lower results in our Japanese joint venture Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
  • Compensation expense of $US1.8 billion increased from $US1.6 billion a year ago on higher revenues. Non-compensation expenses of $US1.5 billion for the current quarter decreased from $US1.7 billion a year ago driven primarily by lower litigation costs.
  • Morgan Stanley’s average trading Value-at-Risk (VaR) measured at the 95% confidence level was $US42 million compared with $US48 million in the second quarter of 2014 and $US52 million in the third quarter of the prior year.

Summary of Wealth Management Results (dollars in millions)

Net Pre-Tax
Revenues Income
3Q 2014 $US3,785 $US836
2Q 2014 $US3,715 $US767
3Q 2013 $US3,481 $US668

WEALTH MANAGEMENT

Wealth Management reported pre-tax income from continuing operations of $US836 million compared with $US668 million in the third quarter of last year. The quarter’s pre-tax margin was 22%. Net revenues for the current quarter were $US3.8 billion compared with $US3.5 billion a year ago.

  • Asset management fee revenues of $US2.2 billion increased from $US1.9 billion a year ago primarily reflecting market appreciation and positive flows.
  • Transactional revenues of $US912 million decreased from $US1.0 billion a year ago reflecting losses related to investments in the Firm’s deferred compensation plans and lower fixed income activity, partly offset by an increase in closed-end fund and other new issue activity.
  • Other revenues of $US112 million increased from $US75 million a year ago principally driven by a gain related to the sale of a retail property space.
  • Net interest income of $US601 million increased from $US493 million a year ago on higher deposits and loan balances.
  • Compensation expense for the current quarter of $US2.2 billion increased from $US2.0 billion a year ago on higher net revenues, partly offset by a decrease in the fair value of deferred compensation plan referenced investments. Non-compensation expenses of $US767 million decreased from $US796 million a year ago primarily due to operating efficiencies resulting from the prior year’s completion of the joint venture acquisition as well as continued expense discipline.
  • Total client assets exceeded $US2.0 trillion at quarter end. Client assets in fee based accounts of $US768 billion increased 18% compared with the prior year quarter. Fee based asset flows for the quarter were $US6.5 billion.
  • Wealth Management representatives of 16,162 decreased from 16,517 compared with the prior year quarter. Average annualized revenue per representative of $US932,000 and total client assets per representative of $US124 million, both records, increased 10% and 13%, respectively, compared with the prior year quarter.
Summary of Investment Management Results

(dollars in millions)

Net Pre-Tax
Revenues Income
3Q 2014 $US655 $US188
2Q 2014 $US692 $US205
3Q 2013 $US828 $US300

INVESTMENT MANAGEMENT

Investment Management reported pre-tax income from continuing operations of $US188 million compared with pre-tax income of $US300 million in the third quarter of last year. The quarter’s pre-tax margin was 29%. Income after the noncontrolling interest allocation and before taxes was $US170 million.

  • Net revenues of $US655 million decreased from $US828 million in the prior year. Results reflect lower investment gains and carried interest in the Merchant Banking and Real Estate Investing businesses, partly offset by higher results in Traditional Asset Management.16,17 The current quarter also reflects lower revenues in the Real Estate Investing business driven by the deconsolidation of certain legal entities associated with a real estate fund sponsored by the Firm.
  • Compensation expense for the current quarter of $US253 million decreased from $US332 million a year ago, principally due to a decrease in the fair value of deferred compensation plan referenced investments. Non-compensation expenses of $US214 million increased from $US196 million a year ago driven by higher legal costs and brokerage and clearing expenses.
  • Assets under management or supervision at September 30, 2014 of $US398 billion increased from $US360 billion a year ago primarily due to market appreciation and positive flows. The business recorded net flows of $US7.6 billion in the current quarter.

CAPITAL

As of September 30, 2014, the Firm’s Common Equity Tier 1 risk-based capital ratio was approximately 14.3% and its Tier 1 risk-based capital ratio was approximately 16.1%. The Firm is subject to a “capital floor” such that these regulatory capital ratios currently reflect the U.S. Basel III Advanced Approaches (“Advanced Approach”) transitional rules, which represent the lower of the Firm’s capital ratios calculated under the Advanced Approach and U.S. Basel I and Basel 2.5 capital rules, taking into consideration applicable transitional provisions under U.S. Basel III.
At September 30, 2014, book value and tangible book value per common share were $US34.17 and $US29.25, respectively, based on approximately 2.0 billion shares outstanding.

OTHER MATTERS

The effective tax rate from continuing operations for the current quarter was 21.0%. The quarter included a discrete net tax benefit of approximately $US237 million primarily associated with the repatriation of non-U.S. earnings at a cost lower than originally estimated.

During the quarter ended September 30, 2014, the Firm repurchased approximately $US195 million of its common stock or approximately 5.9 million shares.

The Firm declared a $US0.10 quarterly dividend per common share, payable on November 14, 2014 to common shareholders of record on October 31, 2014.

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