Morgan Stanley said Wednesday it lost $2.37 billion during its fiscal fourth quarter as it took a range of losses on assets amid one of the roughest quarters for investment banks.
The New York-based firm, which is aggressively building on its new status as a bank holding company, lost $2.34 per share for the quarter ended Nov. 30. It lost $3.61 billion, or $3.61 per share, during the year-ago period when it took a $9.4 billion write-down on mortgage-related assets as the housing crisis began to spiral downward.
Analysts polled by Thomson Reuters, on average, forecast a loss of 34 cents per share. Analysts have been slashing their estimates for the past several weeks amid the ongoing market turmoil. Only a month ago, they were estimating Morgan Stanley would earn 30 cents per share. Over the past year amid the tumult, analyst estimates have often varied wildly from actual results because of uncertainty surrounding banks' holdings and the value of some illiquid assets.
Morgan Stanley took a wide range of charges and losses during the quarter as the value of many assets held by banks plummeted amid the ongoing turmoil. Asset values also plunged sharply in November after the federal government reversed course and said it no longer planned to use its $700 billion bank rescue program to purchase troubled assets from financial firms.
"Market investors love stability and knowing where policy is headed," said Michael Wong, an equity analyst at Morningstar Inc. This policy "flip-flop" caused investors to worry, he said.
Denise Valentine, a senior analyst at Aite Group LLC, said that once the government changed its mind, some companies started selling assets at fire-sale prices in an effort to recoup some money on the investments. Once one sale is completed at a low price, it sets a market price for future sales, she added.
Since accounting rules require banks such as Morgan Stanley to mark their asset inventory at current market prices each quarter — even if the bank did not sell any assets — it has to take losses based solely on end-of-quarter valuations, Valentine said.
Morgan Stanley's asset write-downs and losses were widespread across most of its businesses. In its institutional securities division, losses ranged from $1.2 billion in the fixed income unit, because of mortgage-related losses, to $1.1 billion in losses and write-downs tied to acquisition financing and securities held by subsidiaries.
The asset management business was plagued by losses tied to principal investments and structured investment vehicles — complex investment funds that essentially collapsed earlier this year amid the market downturn.
Morgan Stanley's quarterly loss comes just a day after competitor Goldman Sachs Group Inc. reported its first quarterly loss since it went public in 1999. Goldman lost a wider-than-expected $2.29 billion, or $4.97 per share. Like Goldman, though, Morgan Stanley was able to post a full-year profit thanks to earnings in each of the three prior quarters. Morgan Stanley earned $1.59 billion, or $1.45 per share, during fiscal 2008.
The pair's fourth-quarter losses came during a period when the investment banking sector nearly collapsed in September as Lehman Brothers Holdings Inc. filed for bankruptcy protection and Merrill Lynch & Co. sold itself.
Both Morgan Stanley and Goldman quickly gained approval to become bank holding companies in an effort to remain independent. The banking structure change allows them to build large deposit bases to help fund operations, which is considered vital amid the market uncertainty that has all but shut down the credit markets.
Morgan Stanley has heartily embraced its new ability to increase its deposit base. Morgan Stanley has actively been raising deposits by offering certificates of deposit through its banking subsidiary. Other plans include using the company's 8,426 financial advisers to raise client awareness of banking services available to Morgan Stanley's global wealth management group; introducing new banking products, such as savings accounts and global currency accounts; and using the firm's Swiss bank to expand international operations.
Colm Kelleher, Morgan Stanley's chief financial officer, said in an interview with The Associated Press that it's unlikely Morgan Stanley will acquire a large retail bank, but he didn't rule out smaller acquisitions that fit in with Morgan Stanley's business mix, such as buying a private bank.
Morgan Stanley currently has about $43 billion in deposits. Kelleher said that over the next three years, Morgan Stanley will look to fund about half of its $750 billion balance sheet with long-term financing, which includes deposits.
During the quarter, Morgan Stanley moved away from some of the business lines that struggled mightily during the past year, which will further reduce the bank's risk. Morgan Stanley began to shrink its prime brokerage business, exited most of its proprietary trading strategies, reduced its principal investments division and exited the residential mortgage origination business.
Those business lines also helped provide the huge profits during the market boom earlier this decade, leaving a potential earnings hole for Wall Street firms as they look to return to profitability.
"Investment banks will still take risks, they just won't take as much risk as they did," Kelleher said. Morgan Stanley will refocus its efforts to return to profitability by investing in and growing its more traditional business lines, such as foreign exchange and commodities trading, and building on its global wealth advisory business, he added.
That global wealth advisory business will certainly be tapped as a source for new deposits and be a focus of business growth, analysts agreed. With advisers already in place working with clients, Morgan Stanley will be able to offer them products such as certificates of deposit and money market accounts, Aite's Valentine said.
"Having that staff (of advisers), they'll be able to target high net-worth individuals and attract higher balances," she added.
Valentine said the global wealth management business will also provide areas for expansion, especially outside the U.S. She said the significant growth of high net-worth individuals in areas such as the Middle East and Asia will provide Morgan Stanley with more customers and markets to build the advisory business.
Aside from being able to build a stronger deposit base to fund operations, the change to a bank holding structure provides wider access to a slew of funding options from the federal government, including the government's bank investment program that was launched in October.
Morgan Stanley was among the first banks to receive funds — a total of $10 billion — as part of the government's revamped $700 billion program now being used to directly invest in banks and try to spur lending.
Morgan Stanley also received a boost when it sold a stake in itself in October to Japanese bank Mitsubishi UFJ Financial Group Inc. for $9 billion. Mitsubishi UFJ, one of Japan's largest banks with $1.3 trillion in deposits, acquired a 21 percent stake in Morgan Stanley for its investment.