Morgan Stanley the second-largest investment bank by market value, said it will spin off its Discover credit-card division and posted better-than-expected quarterly results on strong banking and trading.
Morgan Stanley has been under pressure for years from shareholders to shed Discover, one of the largest credit card issuers in the world but until recently a business that struggled to generate strong growth in loans and earnings.
"The spin-off will unlock considerable value for the shareholders of Morgan Stanley," Chairman and Chief Executive John Mack said in a statement. The securities and credit card businesses can grow more quickly if separated, he said.
Morgan Stanley expects to issue shareholders stock in Discover during the third quarter of next year on a tax-free basis.
A year ago, Mack canceled a previously announced Discover spin-off, arguing the unit played a valuable role supporting the company's financial strength and providing earnings stability.
Debt rating agency Fitch Ratings cut Morgan Stanley's credit outlook to "negative," noting Discover generates substantial cash. Discover reported its best annual results ever this year with pretax income up 72 percent to $1.6 billion on $4.3 billion net revenue.
Still investors for years argued that Morgan Stanley and Discover would both be better off as separate companies. Discover, which has its own headquarters in a Chicago suburb, has never been integrated with the rest of Morgan Stanley.
"This is very good news about Discover," Sanford Bernstein analyst and former Morgan Stanley treasurer Brad Hintz said. "Discover was slow growing. The longer you hung on, the more it
reduced the value of the company."
Hintz also said Morgan Stanley posted an excellent quarter in investment banking. So far this year, Morgan ranked second in completed mergers and acquisitions, second globally in initial public offerings and third in global announced M&A.
Morgan Stanley, unique in its combination of banking, brokerage and payments businesses, said net income fell to $2.21 billion, or $2.08 a share, for the fiscal fourth quarter that ended Nov. 30, from $2.47 billion, or $2.32, in the year-ago period.
The prior year's results included a $280 million tax benefit as well as a $700 million gain from its sale of an aircraft leasing business. Excluding results from that business, income from continuing operations rose 26% to a record $2.21 billion, or $2.08 a share.
The earnings per share exceeded the average analyst estimate of $1.77 a share compiled by Thomson Financial.
Morgan shares are extending recent gains. They closed Monday at $80.37, the highest level
since February 2001. The stock is up more than 42% this year, three times the 14% advance by the benchmark S&P 500 Index.
Wall Street firms shattered earnings records this year, fueled by all-time highs for takeover activity as well strong revenue from offerings and trading. Morgan's securities businesses, though, have been held back down by slower growth in Discover, brokerage and asset management.
Quarterly net revenue rose 24% to $8.63 billion, fueled by record pretax income from its banking and trading businesses. Advisory fees rose 34% to $642 million, the highest in seven years, driven by M&A and real estate.
Debt underwriting soared 72%, but revenue from stock offerings plunged 29% from the year-earlier period. Overall, underwriting revenue rose 14% to $709 million.
Morgan Stanley also generated record net revenue of $2.3 billion from debt sales and trading, despite a slight decline in commodities. Equities trading net revenue surged 20% to a record $1.4 billion in the quarter.
Morgan also noted its tax rate fell to 30% from 34% last year, the result of a favorable federal tax audit and increase in U.S. tax credits.
For the year, net income surged 51% to a record $7.47 billion. Book value at the end of the fiscal year was $32.67 a share.
Morgan Stanley also said it authorized a new $6 billion stock buyback plan. In the past year it repurchased about 52 million shares for $3.4 billion.