Earnings Preview: Morgan Stanley

posted: 35 DAYS AGO

Text SizeAAA

NEW YORK -Morgan Stanley is scheduled to report third-quarter financial results on Wednesday. The following is a summary of key developments and analyst opinion related to the period.

OVERVIEW: Trying to bounce back from a second-quarter loss, Morgan Stanley is still grappling with souring investments tied to commercial real estate.

Analysts widely expect the New York-based bank to return to profitability in the third quarter, but it will still probably be forced to cut the value of commercial real estate investments.

Commercial real estate loans are the latest in a wave of lending defaults that started a couple of years ago with residential mortgages given to customers with poor credit history. Morgan Stanley heavily invested in investments backed by commercial real estate, and is likely to take further charges tied to those investments in the third quarter.

Morgan Stanley will look to offset those charges through improving investment banking and trading operations.

Analysts say Morgan Stanley's second-quarter results fell well short of one of its few competitors left standing on Wall Street after the credit crisis, Goldman Sachs Group Inc., because of its more conservative approach to trading. Investors will be looking for any signs of a rebound in Morgan Stanley's trading operations.

Its retail brokerage business, Morgan Stanley Smith Barney, could also provide strength for the bank.

BY THE NUMBERS: Morgan Stanley is expected to earn 29 cents per share during the third quarter on revenue of $6.99 billion.

Morgan Stanley earned $1.43 billion, or $1.32 per share, on revenue of $8.05 billion in the year-earlier third quarter.

As part of its switch to become a bank holding company late last year amid the peak of the credit crisis, Morgan Stanley changed its reporting schedule to calendar quarters.

ANALYST TAKE: Credit Suisse analyst Howard Chen predicts Morgan Stanley will see a seasonal slowdown in investment banking operations, including equity and debt underwriting. However, that decline along with write-downs on real estate investments will be more than offset by growth in equities sales and trading thanks to a surging stock market. Revenue from the Smith Barney joint venture will also boost revenue, Chen said.

Chen forecasts Morgan Stanley will earn 17 cents per share in the third quarter on revenue of $7.1 billion.

WHAT'S AHEAD: Morgan Stanley will continue to integrate Morgan Stanley Smith Barney, the retail brokerage unit in which it purchased a majority stake from Citigroup Inc. earlier this year, and merged with its wealth management unit. It is widely expected Morgan Stanley will exercise its eventual option to purchase the remaining 49 percent stake it does not already own.

Morgan Stanley also said late Monday it agreed to sell its retail asset management business, which includes Van Kampen and Morgan Stanley funds, to Invesco Ltd. for $1.5 billion in a cash and stock deal.

Fox-Pitt Kelton analyst David Trone said the impact of the sale would be minimal, with any lost revenue from the business being offset by dividends from Invesco shares, excluding any valuation adjustments on the change in Invesco's share price.

The deal with Invesco is expected to close in the middle of 2010.

The changes in businesses will be coming as Morgan Stanley transitions to a new CEO. Morgan Stanley said in September that James Gorman will take over as CEO in January from John Mack. Mack will stay on as chairman of the board.

Gorman, a 51-year-old Australia native, joined Morgan Stanley in February 2006 and most recently has served as the bank's co-president.

STOCK PERFORMANCE: Shares of Morgan Stanley rose 8.3 percent during the third quarter. Both the Dow Jones industrial average and the broader Standard & Poor's 500 indexes gained 15 percent during the third quarter.

2009-10-20 14:30:34