Morgan Stanley Misses on Big Slide in Trading Revenue

Morgan Stanleyreported quarterly earnings thatmissed analysts' expectations on a sharp drop in its trading-related businesses, sending shares lower in pre-market trading on Thursday.

Morgan Stanley
Oliver P. Quillia for
Morgan Stanley

Morgan delivered second-quarter earnings excluding items of 28 cents per share, up from a loss of 38 cents a share in the year-earlier period.

After the earnings release, the bank's shares fell more than 4 percent in trading before the opening bell. (Click here to get the latest quote.)

Revenue was $7billion, a decrease from $9.28 billion a year ago.

Analysts had expected the company to report earnings excluding items of 43 cents per share on revenue of $7.7 billion, according to Thomson Reuters.

Fixed-income trading saw revenue drop to $770 million from $1.9 billion a year ago, while equity trading dropped to $1.1 billion from $1.8 billion. Analysts had expected Morgan Stanley to report $1.39 billion in fixed income and $1.37 billion in equities, according to StreetAccount.

The company said compensation expense fell to $3.6 billion from $4.6 billion a year ago.

Morgan Stanley's commodities trading risk rose by 10 percent in the second quarter from the previous three months, making it the first Wall Street bank to buck the declining trend of commodities risk during the quarter.

The company's Value-at-Risk (VaR) in commodities averaged $34 million per day in the three months to June, versus $31 million in the first quarter and $29 million in the second quarter of 2011.

VaR is an important consideration for investment banks when making trading and hedging decisions for an asset class. In Morgan Stanley's case, its VaR readings are based on a 95 percent confidence level of the potential loss it could make in trading commodities and other assets over a one-day time horizon.

Morgan Stanley's key rivals, Goldman Sachs and JPMorgan Chasereported a lower commodities VaR in the second quarter after unexpected twists and turns in oil, metals and grains prices that resulted in difficult trading conditions.

The company said that as a result of its credit ratings being downgraded in June, it posted $2.9 billion of extra collateral with trading counterparties in derivatives. Its counterparties were entitled to ask for $6.3 billion under its agreements with them.

Moody's Investors Service cut its ratings on the bank to "Baa1," three steps above junk, on June 21 as part of a broad re-evaluation of banks exposed to capital markets businesses like stock and bond trading.

The 2011 second-quarter results included a charge linked to the bank's conversion of preferred stock owned by Japan's Mitsubishi UFJ Financial Group into common stock.