Thursday, October 18, 2012

Morgan Stanley: fiscal cliff daunts businesses

In this Wednesday, Oct. 10, 2012, photo, people pass Morgan Stanley headquarters in New York. Morgan Stanley reported higher revenue and net income for its third quarter Thursday, Oct. 18, 2012, thanks to gains in its bonds and asset management businesses. Excluding an accounting charge, the bank earned $535 million for common shareholders in July to September, up from $39 million a year ago. (AP Photo/Richard Drew)

In this Wednesday, Oct. 10, 2012, photo, people pass Morgan Stanley headquarters in New York. Morgan Stanley reported higher revenue and net income for its third quarter Thursday, Oct. 18, 2012, thanks to gains in its bonds and asset management businesses. Excluding an accounting charge, the bank earned $535 million for common shareholders in July to September, up from $39 million a year ago. (AP Photo/Richard Drew)

In this Wednesday, Oct. 10, 2012, photo, people pass Morgan Stanley headquarters in New York. Morgan Stanley reported higher revenue and net income for its third quarter Thursday, Oct. 18, 2012, thanks to gains in its bonds and asset management businesses. Excluding an accounting charge, the bank earned $535 million for common shareholders in July to September, up from $39 million a year ago. (AP Photo/Richard Drew)

(AP) ? Morgan Stanley said Thursday that its corporate clients are ready to do business ? but they're a little unnerved by the impending fiscal crisis.

The bank reported higher revenue and net income for the third quarter after stripping out an accounting charge, helped by a jump in underwriting and trading bonds. Executives described the markets as calm, especially compared to the chaos of a year ago, when the third quarter was rocked by a downgrade of the U.S. government's debt, a budget standoff in Congress and the European debt crisis.

But businesses aren't going full bore on deal-making, if Morgan Stanley's results are any indication. Revenue that the bank made from advising companies on mergers, acquisitions and other strategy fell. So did revenue from underwriting stock offerings, as well as revenue from trading stocks on behalf of clients.

Chief Financial Officer Ruth Porat said that many businesses, though interested, are waiting to see what happens with the U.S. fiscal cliff. That's when higher tax rates and lower government spending are scheduled to kick in at the beginning of the year, unless Congress can work out a compromise before then.

"We're having vibrant conversations, and they know what they want to do," Porat said in an interview. "But they need a little more clarity."

After excluding an accounting charge, Morgan Stanley's net income for common shareholders jumped over the year, to $535 million from $39 million. Revenue also rose, beating expectations. Including the accounting charge, the bank lost money and revenue fell.

The bank has been moving more into working with individual customers, notably with the Morgan Stanley Smith Barney retail brokerage. The brokerage, while not as glamorous as higher-risk businesses, does provide a steady source of revenue. And Morgan Stanley and the rest of the banking industry are navigating a new regulatory environment that has crimped some of its old sources of revenue.

The bank makes money in the retail brokerage largely through charging fees when it helps customers manage their money. Riskier bank activities, like banks trading for their own profit, can offer the opportunity for bigger profits. But that type of trading is being stamped out by new regulations. It also carries the risk that banks can miscalculate and suffer huge losses.

Morgan Stanley jointly owns the Morgan Stanley Smith Barney brokerage with Citigroup, and is in the process of buying out Citi's stake. This quarter brought a coup for Morgan Stanley when it muscled through the negotiations, securing a sale price that was much lower than Citi wanted. As a result, Citi had to take a $4.7 billion write-down when it announced its own third-quarter earnings on Monday.

In a call with analysts, CEO James Gorman said Morgan Stanley was positioned well "for the future and the new regulatory landscape."

Like other banks, Morgan Stanley has been slashing jobs and expenses to cushion itself against the uncertain economy. It shed about 4,500 jobs over the year, or about 7 percent of its work force. It spent more on paying its employees, though. Compensation and benefits expense rose 8 percent to $3.9 billion.

Revenue rose in most areas where the bank does business. It tripled in the asset management unit, which helps sophisticated clients ? mostly institutions ? invest in private equity, real estate and other investments. The bank noted gains in real estate investing, and said that clients were putting more money into certain funds.

Overall, revenue rose 18 percent to $7.6 billion after excluding the accounting charge. That beat the $6.4 billion that analysts were expecting, according to FactSet.

If the accounting charge is included, the bank lost $1 billion in the quarter versus income of $2.1 billion in the same period a year ago, and revenue fell 46 percent to $5.3 billion.

The charge was related to a controversial accounting rule that governs how banks value their debt. When the value of a bank's debt rises, it has to take a write-down because, theoretically, it would have to pay more to buy back its debt on the open market. The rule has been criticized as confusing, because it penalizes banks when their value to investors is actually rising. The rule could be phased out as early as next year.

Morgan Stanley's stock edged down in afternoon trading, losing 61 cents to $17.88.

Associated Press

Source: http://hosted2.ap.org/APDEFAULT/f70471f764144b2fab526d39972d37b3/Article_2012-10-18-Earns-Morgan%20Stanley/id-47b5d75ad5fd4448a1ef7f009156f234

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