2 Major Wall Street Firms Say Profits Fell
Despite Rally
June 19, 2003
By LANDON THOMAS Jr.
Morgan Stanley reported a 25 percent decline in earnings
yesterday and demonstrated how vulnerable the big
investment banks can be when they depend on an
unpredictable trading environment to drive profitability.
The disappointing results from Morgan Stanley and Bear
Stearns, which also reported a profit decline yesterday,
show that the big Wall Street firms have yet to cash in on
the recent stock market revival. Instead, firms continue to
focus on the easier if not riskier game of relying on
bond-trading profits in a low interest rate environment.
While Morgan Stanley's bond trading results were stronger
than a year ago, they were weaker than what analysts had
expected. The bank also took a $287 million charge against
earnings because of continuing problems in its aircraft
leasing business. In all, earnings fell 25 percent from a
year earlier.
Investors pushed down Morgan Stanley's stock nearly 6
percent, or $2.78, to $46.89.
Bear Stearns said its profits declined 20 percent in the
second quarter. But excluding a one-time gain from a public
offering a year earlier, they rose 38 percent.
The company attributed the strong performance in its core
business to robust gains in its fixed-income division. Net
revenues in the division increased 48 percent in the latest
quarter from a year ago.
The stock of Bear Stearns fell 3 percent yesterday, or
$2.47, to $80.01. Since the beginning of the year the stock
has gained 35 percent, compared with 17 percent for Morgan
Stanley and 26 percent for Merrill Lynch.
Morgan Stanley has traditionally been viewed as
conservative among the Wall Street investment banks because
of its broad mix of businesses, including credit cards and
asset management. But problems at its aircraft unit have
made it look riskier to investors.
Stephen S. Crawford, Morgan Stanley's chief financial
officer, said yesterday that the firm would stick with the
aircraft business for the near future. "We were looking to
get out of the business, but because of dislocations in the
business, that is not the case now," he acknowledged in a
conference call.
The firm's bond sales and trading division had a strong
performance, with revenues rising 48 percent from a year
earlier.
Though the figures for trading revenue were impressive on
the surface, revenue actually fell from the first quarter
of this year when the bank recorded some extraordinary
results from commodities-related trades. When market
volatility - which tends to benefit traders - decreased
this quarter, so did the bank's trading profits,
underscoring the problem with a dependence on trading.
Fixed-income sales and trading revenue fell 21 percent from
the first quarter of this year; equity trading revenue
declined 9 percent.
"Their trading numbers were below what the Street was
expecting," said Richard K. Strauss, a securities analyst
at Deutsche Bank. "And compared to other firms, they won't
look as good. Morgan Stanley really needs the I.P.O. and
mergers-and-acquisition business to come back, and that's
not happening yet."
Morgan Stanley also provided some early signs that the
recent stock market revival has begun to attract retail
investors. The bank reported a 7 percent sequential
increase in its brokerage assets during the second quarter,
the first quarterly growth since late 2000. Still, the
bank's larger business related to equities continued to
lag.
Morgan Stanley's advisory business, which includes mergers
and acquisitions, was down 44 percent for the second
quarter, and revenues from stock underwriting declined 5
percent from what was a weak quarter last year.
The aircraft leasing charge was a result of a misguided
attempt by Morgan Stanley to enter the aircraft leasing
business in 2000. The business consists of 180 planes and
is now valued at $4.8 billion on the firm's balance sheet.
The global slump in the airline industry has forced the
firm to start writing down the value of these assets.
Morgan Stanley has acknowledged in regulatory filings that
the leasing business was overvalued by as much as 20
percent, and analysts estimate that the eventual
write-down, before yesterday's charge, could be as much as
$900 million.
In his conference call, Mr. Crawford also said that Morgan
Stanley had reduced its head count by 1,000 this year and
that he expected staffing to remain level through the end
of the year.
For the quarter, Morgan Stanley's earnings were $599
million, or 56 cents a share. Bear Stearns second-quarter
earnings were $280 million, or $2.27 a share.
Included in Morgan Stanley's expenses was an $80 million
charge to cover possible legal claims related to its
granting of shares in initial public offerings to corporate
clients. By setting aside such a specific reserve, Morgan
Stanley is taking an aggressive stance against future
penalties arising from litigation.
Morgan Stanley and 54 other financial institutions are
defendants in a suit filed by individual investors who
contend that the banks fraudulently manipulated initial
public offerings. The suit is aiming for class-action
status.
In February, Judge Shira A. Scheindlin of the United States
District Court for the Southern District of New York turned
back a request from the banks to dismiss the case. And in
March, lawyers for the plaintiffs petitioned Judge
Scheindlin to increase the number of companies covered in
the suit to 900 from 300.
Copyright 2003 The New York Times Company