Among the company's divisions, quarterly revenues from Institutional Securities declined sharply due to the mortgage-related writedowns. However, Global Wealth Management Group reported a 23% growth in revenues, while Asset Management division recorded a 29% increase in revenues.
Fourth Quarter Results
For the fourth quarter, the company's net loss was $3.59 billion or $3.61 per share compared to net income of $2.21 billion or $2.08 per share in the prior-year quarter. On average, eighteen analysts polled by First Call/Thomson Financial expected the company to report a loss of $0.39 per share for the quarter.
On a sequential basis, the company reported a net loss compared to net income of $1.54 billion or $1.44 per share in the prior quarter.
Net loss for the quarter applicable to common shareholders was $3.61 billion compared to earnings applicable to common shareholders of $2.19 billion a year ago.
In the most recent quarter, the company recognized a total of $9.4 billion in mortgage-related writedowns due to continued deterioration and lack of liquidity in the market for subprime and other mortgage related securities since August 2007. The company said that the additional $5.7 billion writedown of U.S. subprime and other mortgage related exposures in November as well as the $3.7 billion writedown as of October 31, 2007 resulted in a write-down of $9.4 billion in the quarter.
Of the total $9.4 billion in writedowns, $7.8 billion represents writedowns of the company's U.S. subprime trading positions. The mortgage-related writedowns for the quarter include $1.2 billion of writedowns related to European Non-confirming loans, CMBS, Alt-A and Non-Performing and Other loans. In addition, the writedowns include an additional $0.4 billion related to securities in the company's subsidiary banks classified as " available for sale."
Loss from continuing operations for the quarter was $3.59 billion or $3.61 per share compared with income from continuing operations of $1.98 billion or $1.87 per share in the previous-year quarter.
Consolidated net revenues for the quarter, which is total revenues less interest expenses, were a negative $450 million compared to revenues of $7.85 billion a year ago. Wall Street analysts estimated revenues of $4.23 billion for the quarter.
Sequentially, consolidated net revenues fell from $7.96 billion in the third quarter.
John Mack, Chairman and CEO of Morgan Stanley, said, "The writedown Morgan Stanley took this quarter is deeply disappointing - to me, to our colleagues, to our Board and to our shareholders. Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007."
Mack added, "Across the Firm, we have moved aggressively to make the necessary changes, and these isolated losses by a small trading team in one part of the Firm should not overshadow the momentum we see in virtually all of our other businesses."
Total revenues for the quarter declined 19% to $14.71 billion from $18.22 billion in the previous-year period.
Of the total revenues, Investment banking revenues improved 4% to $1.57 billion from $1.50 billion in the prior-year quarter, while trading revenues were a negative $7.17 billion compared to revenues of $2.32 billion in the previous-year quarter. Revenues from Investments grew 42% to $820 million from $578 million in the similar period of last year. Commissions grew 32% to $1.29 billion from $976 million in the previous-year quarter. Asset management, distribution and administration fees climbed 30% to $1.74 billion from $1.34 billion in the year-ago quarter. Interest and dividends grew 43% to $16.11 billion from $11.29 billion a year ago.
Interest expenses surged 46% year-over-year to $15.16 billion from $10.37 billion in the previous-year period. Total non-interest expenses for the period increased 3% to $5.35 billion from $5.20 billion in the prior-year period.
As of November 30, 2007, the Company repurchased approximately 52 million shares of its common stock since the end of fiscal 2006.
Morgan Stanley said that it has taken several actions to address the disruptions in the securities market. These include the appointment of Walid Chammah and James Gorman as Co-Presidents, the appointment of Michael Petrick as Global Head of Sales and Trading, in addition to other management changes. In order to enhance the company's risk management function, the company strengthened staff and have them reporting directly to CFO, Colm Kelleher. The company also said it consolidated all of its proprietary trading activities under common leadership, reporting to Petrick.
Institutional Securities
Quarterly revenues from Institutional Securities were a negative $3.43 billion compared with net revenues of $5.48 billion in the prior-year quarter. The segment's pre-tax loss was $6.48 billion, compared to pre-tax income of $2.20 billion in the similar period of last year, reflecting the mortgage-related writedowns.
Advisory revenues grew 30% year-over-year to $779 million. Underwriting revenues declined 18% to $584 million. Equity underwriting revenues were $348 million, a 37% increase from the prior year, while fixed income underwriting revenues declined 48% to $236 million from the same period of last year.
Equity sales and trading net revenues surged 72% to $2.5 billion from the prior-year period, on increased trading results and strong client flows across both the cash and derivatives markets. Meanwhile, fixed income sales and trading recorded a net loss of $7.9 billion compared with net revenues of $2.3 billion in the prior-year quarter, reflecting the mortgage-related writedowns.
Investment revenues increased to $496 million from $335 million in the similar period of last year, with gains from investment revenue associated with returns in the company's employee deferred compensation and co-investment plans as well as Bovespa Holding S.A.
Global Wealth Management
For the fourth quarter, Global Wealth Management Group generated revenues of $1.79 billion, a growth of 23% from $1.45 billion last year, reflecting stronger transactional revenues, higher asset management revenues resulting from growth in fee-based products and higher net interest revenue from growth in the bank deposit sweep program. Quarterly pre-tax income more than doubled to $378 million from $169 million in the fourth quarter of last year.
Total client assets increased 12% to $758 billion from the previous-year quarter. Annualized revenue per global representative in the quarter was $853 thousand.
Asset Management
Revenues for the Asset Management division climbed 29% to $1.25 billion from $973 million in the prior-year period, primarily reflecting higher asset management and higher performance fees from the alternatives business, including FrontPoint Partners. Asset Management's pre-tax income for the fourth quarter increased to $294 million from $268 million a year earlier. The results for the latest quarter include losses of approximately $129 million related to securities issued by structured investment vehicles or SIVs held by Asset Management.
Net customer inflows for the quarter were $0.4 billion. At quarter-end, assets under management or supervision reached $597 billion, a 20% increase from a year ago, driven by increases in alternative, equity and institutional money market asset classes.
Full Year Results
For fiscal year 2007, the company's net income fell to $3.21 billion or $2.98 per share from $7.47 billion or $7.07 per share a year ago. Analysts expected the company to report earnings of $5.43 per share for the year.
Income from continuing operations for the year declined to $2.56 billion or $2.37 per share from $6.34 billion or $5.99 per share in the previous year.
Net revenues for the year declined 6% to $28.0 billion from $29.8 billion last year. Analysts had a consensus revenue estimate of $33.26 billion for the year.
Return on average common equity for the full year was 8.9%, compared with 23.5% a year ago.
Dividends
The Company announced that its board of directors declared a $0.27 quarterly dividend per common share, which is payable on January 31, 2008, to common shareholders of record on January 11, 2008. In addition, the company announced that its board of directors declared a quarterly dividend of $379.66 per share of Series A Floating Rate Non-Cumulative Preferred Stock to be paid on January 15, 2008 to preferred shareholders of record on December 31, 2007.
China Investment Corp. Investment
Morgan Stanley said that it entered into an agreement with China Investment Corp. Ltd. or CIC as a long-term financial investor to issue new capital of about $5 billion through Equity Units with mandatory conversion into common stock. The company noted that the equity units would help to further bolster its capital position and build on the company's deep historic ties and market leadership in China.
In October, Morgan Stanley's peer, Bear Stearns Cos. (BSC | charts | news | PowerRating) agreed to a $1 billion cross-investment from China's government-controlled Citic Securities Co., while last month, Citigroup Inc. (C) received a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government last month.
Morgan Stanley noted that CIC's ownership in Morgan Stanley's common shares, including the conversion of these equity units, will be 9.9% or less of Morgan Stanley's total shares outstanding. CIC will be a passive financial investor and will have no special rights of ownership as well as no role in the management of Morgan Stanley, including no right to designate a member of the Firm's Board of Directors.
The company said that each Equity Unit is mandatorily convertible into Morgan Stanley shares at prices between a reference price and a threshold price at a premium of 20% to the reference price. The equity units convert to Morgan Stanley common shares on August 17, 2010, subject to adjustment of the stock purchase date. Further, the company said that each Equity Unit will pay a fixed annual payment rate of 9%, payable quarterly.
Peer Performance
Among the company's peers, Lehman Brothers Holdings Inc. (LEH | charts | news | PowerRating) reported a 12% decline in its earnings for the fourth quarter to $886 million from $1.00 billion a year ago. Net income applicable to common stock declined to $870 million or $1.54 per share from $987 million or $1.72 per share in the prior-year quarter. The company's quarterly net revenues totaled $4.39 billion, down 3% from $4.53 billion in the same quarter of last year. Strong performance in the equities capital markets business helped Lehman to lessen the impact of revenue declines in its capital markets and investment banking businesses.
Another financial services provider Goldman Sachs Group Inc. (GS | charts | news | PowerRating) reported a 2.2% increase in its earnings for the fourth quarter to $3.22 billion from $3.15 billion in the previous-year quarter, helped by strong segmental revenues, especially in investment banking and asset management and securities services. Net earnings applicable to common shareholders rose to $3.17 billion or $7.01 per share from $3.10 billion or $6.59 per share in the prior-year quarter. The company's quarterly revenue, net of interest expense, came in at $10.74 billion, up from $9.41 billion last year.
Bear Stearns Companies Inc. (BSC | charts | news | PowerRating) is slated to announce its financial results for the fourth quarter on December 20. Analysts expect the company to report a loss of $1.79 per share on revenues of $625.09 million for the quarter.
Stock Quote
In Wednesday's regular trading session, MS is currently trading at $49.89, up $1.82 or 3.79% on a volume of 10.78 million shares. For the past 52 weeks, the stock has been trading in a range of $47.25-$90.95.
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