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Morgan Stanley reported earnings today that beat expectations. Analysts expected profits of $0.27 a share and the bank reported profits of $0.45 a share excluding accounting charges (see an explanation of that below).Of course share price and profits are interesting for a bank that was seeing losses of $0.15 a share this time last year, but in Morgan Stanley’s case they’re not as interesting as what’s going on with compensation costs.
The bank’s CEO James Gorman has been the most vocal CEO on the Street about the need to cut costs in the business of banking. He’s said that Wall Street has “too many overpaid bankers”, and in Q1 2013 already announced 1600 layoffs and 100% deferred compensation for any employee making over $350,000 (except for wealth managers).
In the first 9 months of 2012, the bank cut 4200 jobs.
It doesn’t help that activist investor Dan Lobe has taken a stake in bank and made it clear that he thinks that some Morgan Stanley bankers are overpaid as well.
That said: It’s important to see what Gorman’s hard line has done to his bank’s bottom line. Compensation expense of $3.6 billion in the current quarter declined from $3.8 billion a year ago. From the full year 2011 to the full year 2012, compensation expense declined from $16.3 billion to 15.6 billion, a change of 4%.
Yup, just 4%, which means we may not have seen the last of the bloodletting from Morgan Stanley.
Part of that is because if you include the accounting charges mentioned above, Morgan Stanley’s profits only hit $0.25 a share.
The charge is a debt valuation adjustment (DVA). It places a value on the company’s debt, and if that increases, it reflects how expensive it would be for the company (Morgan Stanley) to buy it back.
According to Bloomberg, Morgan Stanley took a $2.3 billion hit this year when its credit spreads tightened.
So there’s still some ways to go here.