Weak Trading Revenues Sink Morgan Stanley Earnings

Excluding debt valuation adjustment (DVA), net revenues for the current quarter totaled $7.33 billion, compared with $8.69 billion a year ago. Excluding DVA and the net discrete tax benefit in the prior year quarter, net income applicable to Morgan Stanley totaled $740 million, or $0.34 per diluted share, compared with net income of $1.3 billion, or $0.64 per diluted share, in the prior year.

Equity sales and trading net revenues of $1.8 billion were unchanged from a year ago, and fixed income and commodities sales and trading net revenues fell from $997 million to $583 million, which the bank attributed to difficult market conditions for its credit and securitized products business.

The bank’s annualized return on average common equity from continuing operations was approximately 5.6% in the current quarter, or 3.9% excluding DVA.

Morgan Stanley’s Basel III common equity tier 1 ratio at the end of September was 13.9% and its tier 1 risk-based capital ratio was about 15.6%. The bank’s tangible book value per common share at the end of the quarter was $29.99, based on approximately 1.9 billion shares outstanding.

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The bank repurchased approximately $625 million of its common stock or approximately 17 million shares in the second quarter.

The bank did not provide guidance in its earnings release. The consensus estimate for fourth-quarter adjusted EPS is $0.63 on revenues of $8.71 billion. For the full year, the consensus calls for $2.95 EPS on revenues of $37 billion.

The bank’s CEO, James Gorman, said:

The volatility in global markets in the third quarter led to a difficult environment, impacting in particular our Fixed Income business and our Asia Merchant Banking business. The Firm benefited from the stability of the Wealth Management business, our ongoing leadership in Equities and the continued strength of our Investment Banking franchise. Our business model provides a steady foundation for the Firm as we navigate these challenging markets and focus intensely on addressing areas of underperformance.

Shares traded down nearly 6% in the premarket Monday to $32.00. The current 52-week range is $30.15 to $41.04. Thomson Reuters had a consensus analyst price target of $39.65 before the results were announced.

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