Morgan Stanley on Tuesday reported a wider-than-expected fourth-quarter loss from continuing operations of $2.24 per diluted share , compared with a loss of $3.61 per diluted share in the same period a year ago.
Analysts polled by Reuters were expecting a loss of $0.33 a share.
First, a shocker of a stat:
Assets under management or supervision at November 30, 2008 of $399 billion declined $198 billion, or 33 percent, from a year ago, partly reflecting the unprecedented reduction in asset values experienced within the industry. The industry also experienced unprecedented customer outflows. Morgan Stanley Asset Management’s decline in assets under management included net customer outflows of $76.5 billion for the quarter, primarily in the Firm’s money market and long-term fixed income funds.
So, there was a run on Morgan Stanley after all…
Other extracts (emphasis FT Alphaville’s):
- Q4 net revenues were $1.8bn, compared with negative $0.4bn in last year’s fourth quarter.
-Full-year fixed income sales and trading net revenues of $3.9bn – compared with $0.3bn the prior year – included record revenues in commodities and foreign exchange, offset by lower revenues in other interest rate, credit & currency products (IRCC) and net mortgage related losses of $2.6bn
- Commodities revenues increased substantially from a year ago primarily reflecting higher market volatility and strong customer flow.
- “continued dislocation in the credit markets resulted in a significant decline in credit products net revenues from a year ago including losses related to monoline exposure and unfavourable positioning”
- “Results for the year also included net revenues of $3.5bn from the widening of Morgan Stanley’s credit spreads on certain long-term debt compared with $0.4 billion in the prior year.”
- Morgan will be launching a retail banking group and recruiting Cece Sutton and Jonathan Witter to lead the business
- John Mack and co-presidents Walid Chammah and James Gorman have gone without a bonus for 2008
- 2008 year-end compensation for the 35 members of the management committee down an average of 65 per cent versus last year
- Excluding financial adviser compensation, the firm’s bonus pool is down about 50 percent for 2008
Moody’s is not impressed with Morgan Stanley’s performance. The rating agency cut the bank’s long-term senior rating to A2 from A1, Bank Morgan Stanley AG’s long term deposit rating to A2 from A1, although it affirmed its C+ bank financial strength ratings and the Prime-1 short-term rating. All ratings have a stable outlook.
From the statement, emphasis FT Alphaville’s:
The risks in Morgan Stanley’s and other wholesale-funded banks’ business model have been highlighted by the market stresses of the past 18 months. These risks include opaque exposures, risk control failures, high leverage, and confidence-sensitivity.
Moody’s commented that Morgan Stanley’s large fourth quarter loss and tepid full year results reported today also factored into the downgrade. The write-downs that drove the fourth quarter 2008 loss highlight the firm’s concentration risks.
Commenting on the full year results, Moody’s observed that Morgan Stanley would have reported a significant net loss if gains from asset sales, gains from widening credit spreads on its own debt, and gains from repurchasing its own debt at a discount were excluded. As stated above, the erosion in certain important Morgan Stanley franchises, including prime brokerage and asset management, was a contributing factor in the downgrade. In contrast to other firms that have been similarly affected, Morgan Stanley did not generate sufficient revenues in the quarter to more fully absorb write-downs, reflecting some weakness in its franchises.
Notwithstanding this, Moody’s said that the previous acute customer and investor confidence pressures on Morgan Stanley appear to have been alleviated in part due to the far-reaching support supplied by the regulators to Morgan Stanley and other large banks. Positively, Moody’s also observed that Morgan Stanley reduced the size of its balance sheet dramatically in the fourth quarter and is reporting high capital ratios compared to many wholesale investment banks.
The decision by Morgan Stanley to register as a bank holding company and submit to regulation and oversight by the Federal Reserve could benefit creditors by placing some additional limits on the firm’s ability to aggressively increase its risk profile in the future. However, Moody’s also believes that as Morgan Stanley’s organizational and funding structure evolves under its new regulatory regime it will likely lead over time to increased structural subordination for holding company creditors relative to bank-level depositors and counterparties. Therefore a one-notch differential between the A1 bank deposit rating and the A2 senior debt rating of the holding company was introduced.
Moody’s views Morgan Stanley as a systemically important institution and its ratings benefit from an assumption of a high likelihood of external support. The incorporation of this level of support results in a two notch lift for both Morgan Stanley and its banking subsidiaries relative to the rating level that would exist in the absence of support. Moody’s said that the rationale for two notches of support, versus one, is that intrinsically weaker firms benefit to a greater degree from support provided by a highly rated entity (in this case, the United States, rated Aaa).