Morgan Stanley Profit Plunges, Despite Asset Sale

Morgan Stanley on Wednesday said quarterly earnings dropped by more than 50 percent on trading losses and a slowdown in investment banking, despite $1.43 billion of pretax gains from asset sales.

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The results beat expectations, but concern about the bank's ability to generate profit growth in the future pulled down its shares.

The second-largest U.S. investment bank reported income from continuing operations of $1.03 billion, or 95 cents a share, for its fiscal second quarter, ended May 31, down from $2.36 billion, or $2.45 a share, a year earlier.

Net revenue fell 38 percent to $6.5 billion from the same quarter last year. The results beat the average analyst forecast of 92 cents a share, according to Reuters Estimates.

The company received a big boost from two one-time items: a $698 million pretax gain from the sale of its Spanish wealth management business and a $732 million pretax gain from the secondary offering of MSCI stock.

"If you have to go all the way to Spain to make numbers, it's not good. How many more rabbits do they have in their hat? What's going to be the driver of earnings growth going forward?" said Matt McCormick, a stock analyst at Bahl & Gaynor Investment Counsel in Cincinnati.

Gains from asset sales helped offset $245 million of severance related to job cuts, $436 million of losses from proprietary mortgage trades and $519 million of net losses on leveraged loans.

The credit crunch is battering banks and brokers, which have been forced to write down more than $400 billion of assets, slash jobs and raise new capital. Morgan Stanley suffered $9.4 billion of fourth-quarter subprime trading losses and then reported first-quarter earnings that fell by half.

Revenue dropped in almost every business. Investment banking fees fell by half. Fixed income trading net revenue sank by 85 percent, reflecting the mortgage losses as well as reductions in other markets.

Meanwhile real estate investment losses led to a pretax loss of $277 million in Morgan Stanley's asset management division. Excluding the Spanish unit sale, wealth management revenue rose 4 percent from last year.

Pressure on Mack

The latest results add to pressure on Chief Executive John Mack, who took over an underperforming Morgan Stanley in 2005 and pushed the company to take on more trading risk, expand leveraged lending and build out a mortgage business at the market's peak.

Morgan Stanley last year sold a $5 billion equity stake to a Chinese government-controlled fund. It has also cut thousands of jobs and pared down its balance sheet.

Morgan Stanley spun off its credit card business, Discover Financial Services, on June 30 last year.

Morgan Stanley follows rival Lehman Brothers , which on Monday reported a disappointing $2.8 billion loss. Goldman Sachs Group said its profit fell by 11 percent amid relatively light losses.

Shares of Morgan Stanley have fallen 24 percent this year, lagging the Amex Securities Broker-Dealer Index and the broader S&P 500 Index.

Morgan Stanley's book value, or assets minus liabilities, was $30.11 per share at the end of the quarter. Morgan Stanley's shares trade at about 1.3 times their book value, less than Goldman's 1.8, but above Lehman's 0.8.