Morgan Stanley Predicts Slower Growth in 2008

Morgan Stanley expects revenue and common equity growth to decline next year amid a more challenging environment, the company's chief financial officer said at a conference on Tuesday.

The world's second-largest securities firm disclosed last week that it suffered $3.7 billion of losses on proprietary mortgage market trades, and warned that it might mark down assets further if markets continued to weaken.

Morgan's revenue in the first nine months grew 29 percent versus the prior year, while common equity rose 22 percent. The growth partly reflected the bank's shift from agency businesses to principal activities, he said.

But weakness in credit markets, and the bank's plans to shrink its balance sheet means those trends will slow.

"While we expect 2008 to be another growth year, we do not expect the current growth trajectory in revenue and average common equity to continue," CFO Colm Kelleher said at the Merrill Lynch Banking and Financial Services conference.

Total assets at the bank have risen 17 percent a year since 2004, but that growth has left

Morgan with the highest leverage ratio among its peers at 32 times shareholder equity. Looking ahead, Kelleher said the firm will reduce some holdings and redirect capital to more lucrative areas such as emerging markets, commodities, wealth management and asset management.

"We plan to be more judicious in how we allocate capital, to ensure the highest risk-return in this environment," he said. Morgan intends to "bring down" its balance sheet to keep leverage levels on par with previous quarter, he said.

Kelleher also said Morgan expects "the market to take longer, several quarters, to return to more normal operating levels," he said.

Demand for collateralized debt obligations (CDOs) will remain muted, hobbling the structured finance business "for an extended period," he said.