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Morgan Stanley's 2nd-Qtr Earnings Decline 24 Percent (Update5)

Morgan Stanley's 2nd-Qtr Earnings Decline 24 Percent

June 22 (Bloomberg) -- Morgan Stanley reported an even bigger decline in second-quarter profit than the world's largest securities firm forecast nine days ago, when Chairman and Chief Executive Officer Philip Purcell said he would step down.

A plunge in revenue from fixed-income trading, lower underwriting fees from stock sales and increased legal expenses led fiscal second-quarter earnings down 24 percent. Net income fell to $928 million, or 86 cents a share, from $1.22 billion, or $1.10, a year earlier, the firm said in a statement today.

Morgan Stanley's steepest quarterly profit drop in more than four years and a 9 percent decline in revenue add to the urgency that the board find a new leader. Purcell, 61, will retire by March after presiding over a five-year tumble of 40 percent in the firm's stock and the loss of at least 55 managers, bankers and traders in less than three months.

``The board has no choice but to look for the kind of person who can restore the franchise, repair the damage, improve the morale within the remaining people and hire some good people from outside,'' said Anthony Gifford a fund manager at Henderson Global Investors Ltd. in London.

Morgan Stanley said pretax profit declined in all of its four main businesses -- investment banking and sales and trading, brokerage for individual investors, asset management and credit cards. The New York-based firm also set aside $140 million after starting talks to settle a lawsuit stemming from Parmalat Finanziaria SpA's collapse.

Trading Slump

The quarter's biggest disappointment came in institutional securities, the division that includes investment banking and sales and trading, where pretax profit fell 27 percent to $830 million. Like rival Goldman Sachs Group Inc. last week, Morgan Stanley's revenue from trading bonds, currencies and commodities tumbled, falling 28 percent to $1.3 billion.

Total revenue fell to $6.04 billion from $6.65 billion.

At the Discover credit card unit that's slated for a possible spinoff to shareholders, profit declined 19 percent on a pretax basis to $242 million.

Morgan Stanley said it's still analyzing the spinoff, which Purcell proposed in April. Proceeding would mean giving Discover as much as $4.7 billion of Morgan Stanley's $113.9 billion in capital, the company said.

Shares of Morgan Stanley fell 45 cents to $50.52 in composite trading on the New York Stock Exchange. The stock has dropped 9 percent since March 28, when Purcell reorganized senior management, triggering the wave of departures and prompting eight former executives to call for his ouster.

Leadership

``There's going to be a change of leadership and we view that as positive,'' said Keith Wirtz, who as chief investment officer of Fifth Third Asset Management helps manage $34 billion, including Morgan Stanley shares. ``The question is still out whether under their current business model they can still execute.''

Morgan Stanley Chief Financial Officer David Sidwell, who conducted a conference call with analysts and investors, provided no update on the firm's CEO search. He said the firm's traders didn't make any wrong bets on the direction of interest rates.

``Trading opportunities were not evident, whether it was spreads widening, interest-rate markets, or commodities,'' Sidwell said in a conference call with reporters.

Morgan Stanley said it started the Parmalat settlement talks after June 13, when Purcell said he would step down. Asked on the call whether the firm didn't raise legal reserves for the lawsuit it lost to billionaire Ronald Perelman because Morgan Stanley's lawyers are confident they can win an appeal, Sidwell replied, ``Yes, that's a good précis.''

The firm faces possible damages of almost $1.5 billion in the suit by Perelman over the firm's advisory role in the sale of Coleman Co. to Sunbeam Corp.

Brokers Leave

At Morgan Stanley's brokerage, pretax profit dropped 11 percent to $118 million and revenue rose 2 percent to $1.2 billion. Sidwell, on the analyst call, said Morgan Stanley continues to lose brokers to competitors. The division's broker ranks dropped to 10,438 from 10,722 a year earlier.

In the money-management division, pretax profit dropped 16 percent to $175 million.

Sidwell said Discover will fund the additional $200 million to $400 million of capital it needs through retained earnings.

``In our capital base, the funding of Discover's capital is not an issue,'' Sidwell said on the call.

Discover

In the second quarter, revenue at Discover was little changed at $878 million. Profit declined in part because the unit spent more on marketing and a rise in personal bankruptcies, Sidwell said.

Morgan Stanley's profit decline contrasts with gains by rivals Lehman Brothers Holdings Inc. and Bear Stearns Cos. Both firms' benefited from gains at their mortgage-backed bond units.

At least one of Morgan Stanley's businesses thrived: Fee revenue from advising on mergers and acquisitions rose 10 percent to $357 million. Morgan Stanley retained its No. 2 ranking among M&A advisers in the second quarter by completing deals worth $95.9 billion, data compiled by Bloomberg show. New York-based JPMorgan Chase & Co. was No. 1, displacing Goldman Sachs, which ranked third.

Morgan Stanley's two top investment bankers, Terry Meguid, 49 and Joseph Perella, 63, left during the quarter, unhappy with Purcell's March 28 management shakeup. That revamp installed Zoe Cruz, 50, and Stephen Crawford, 41, as co-presidents.

Underwriting

Second-quarter revenue from underwriting fell 33 percent to $378 million, paced by a 54 percent plunge in fees from stock sales. Morgan Stanley ranked fifth in equity offerings during the period, down from second a year ago.

Revenue from fixed-income underwriting fell 8 percent.

Shares of Morgan Stanley are down more than 52 percent from their peak in September 2000. That compares with the 50 percent gain of the 12-member Amex Securities Broker/Dealer index, which includes Morgan Stanley. In the second quarter, Morgan Stanley shares fell 13.3 percent, while Lehman Brothers's stock rose 1.1 percent, the most of Wall Street's five biggest securities firms.

Purcell's shakeup also prompted Vikram Pandit, 48, who ran institutional securities, and former head of equity sales and trading, John Havens, also 48, to quit. Stephan Newhouse, who lost the president's job to Cruz and Crawford, followed them out the door.

The board, in its search for a new CEO, has said it won't hire any of the departed bankers. Nor will it consider representatives of the so-called group of eight or John Mack, the former president whom Purcell ousted in 2001.

To contact the reporter on this story:
Margaret Popper in New York at [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000103&sid=a2bY2NFD8iTM&refer=us