Morgan Stanley advances target to cut risky assets

Legal bills lead to sharp drop in quarterly profit

Morgan Stanley rolled forward its plan to reduce its risky assets as the Wall Street bank focuses on generating a higher return on equity, a measure where it lags its rivals.

The bank, which reported a sharp fall in quarterly profit today due to large legal bills, delivered an adjusted return on equity of 6 per cent in 2013, far short of the 11 per cent generated by Goldman Sachs & Co.

Net income from continuing operations applicable to the company fell to $192 million, or 7 cents per share, in the fourth quarter from $661 million, or 33 cents per share, in the same quarter of 2012.

Excluding items such as $1.2 billion in legal expenses, the bank earned 50 cents per share, according to Thomson Reuters, beating the average analyst estimate of 45 cents.


Morgan Stanley shares, which have risen 56 per cent in the past year, were up about 1 per cent before the opening bell.

Morgan Stanley, which has been working to reduce its risk-weighted assets to below $200 billion by 2016, said it would now aim to reach that target by 2015.

The bank plans to reduce its risky holdings largely by shedding fixed-income assets that tie up too much capital under new banking regulations.

Chief executive James Gorman has also been shifting the bank's focus to less-risky products that can be traded electronically and cleared through exchanges.

Revenue from Morgan Stanley’s wealth management business, which has become increasingly important as the bank moves away from risky trading, rose 12.2 per cent from a year earlier to $3.73 billion, accounting for 47.6 per cent of total revenue.

The profit margin in that business was 20 per cent, excluding an impairment charge. Mr Gorman had set a target of at least 20 per cent.

Morgan Stanley, the last of the major US banks to report quarterly results, said today it would now aim for a pretax margin for the wealth business of 22 to 25 per cent by the fourth-quarter of 2015.

The business has lagged major rivals on that measure. Bank of America’s wealth business, for example, delivered a pretax margin of 26.6 per cent in the quarter.

Morgan Stanley bought Citigroup’s last remaining stake in the wealth business in July and the unit’s deposits are gradually being transferred.

The bank’s total net revenue from continuing operations rose 12.5 per cent to $7.83 billion.

Revenue from fixed-income trading fell 14.4 per cent to $694 million. The bond market began to soften in the middle of the year as investors braced for the Federal Reserve to start scaling back its bond-buying stimulus and longer-term yields rose.

Goldman Sachs Group and Citigroup also reported weaker results from fixed-income trading in the quarter, while JPMorgan Chase & Co and Bank of America produced higher revenue.

As for most Wall Street banks, the equities market was a bright spot for Morgan Stanley in the latest quarter.

Equities trading revenue rose to $1.5 billion from $1.4 billion, while equity underwriting revenue rose 75 per cent to $416 million, thanks to an increase in both initial public offerings and secondary stock offerings.

Revenue from the bank’s investment management business rose 40.6 per cent to $842 million. (Reuters)