Bank results Season: Morgan Stanley gets a busy underwriting season
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James P Gorman’s stay at the top of the Company got some credibility this quarter as the bank finally achieved a dream run, showing glimpses of what has made it a global powerhouse two decades earlier. It garnered Investment Banking revenues of $1.5 bln comparable with Goldman Sachs and JP Morgan as also BofA albeit on $941 bln at the top of the league tables from underwriting and then the rest in advisory income.
The main item on the financials of course is that the firm has converted its MUFG stake of preferred into 385 mln common shares. As this involved changing the conversion ratio from its heady days whenthe deal was struck in 2007., the firm took a hefty $1.7bln charge in retained earnings for issuing the extra 75 mln equity shares to MUFG. Reserves and Capital remain fine as it gets added back in the common and Tier I common by Basel I gets boosted to 14.8% and Tier I Capital to 16.8%. Infact Basel 2.5 and Basel 3 targets would also be much more achievable for the bank/firm going forward with the new 22. 8% stake in common for MUFG from the $9 bln. The JV with MUFG in securities also added a loss of $650 mln in this quarter. However the net loss of the bank was only $0.38 cents , a $1.02 loss from the change in conversion ratio.
Morgan Stanley’s revenues for the quarter were a good $9.3 bln, with FICC trading $2.1 bln and equities also a high $1.9 bln depending on a single client/small base of clients. Equities underwriting income was healthy at $419 mln. The firm has bagged the Zynga IPO and is #2 in global annoounced M
Compensation exp for the quarter grew to a 50% ratio despite higher revenues at $4.7 bln from $3.8 bln last year. The Asset Management team integrating Smith Barney is rumored to be heading for a reduction in its Broker strength from 17638 odd right now. Client Assets in Global Wealth Management are competitive at $1.7 tln.
Comp ratio was 43% incl DVA impact of $500 mln lesser than $750 mln counted as revenue last year
Non Comp expenses were also higher at $2.7 bln higher by 10% QoQ . $130 mln of these were for the start up costs at its new China Securities JV MS Huaxin Securities where it is allowed to trade in Chinese denominated debt and market making in trade finance etc. Shares outstanding end of periosd is now 1.9 bln, average here at 1.46 bln with a book value of around $30 per share
MS remains the only firms with growing trading revenue despite issues of low client base with a 14% higher trading volume/income from Q1. Total assets are $831 bln on June 30, 2011
DVA= Debt Valuation Adjustment = Credit spread at end of period on holdings vis a vis credit spreads on the same at start of period, near definition of unrealised gain for debt, yielded a revenue of $244 mln in Q2 2011 and $750 mln in Q2 2010