A man leaves the Morgan Stanley corporate headquarters building in New York.(Photographer: Daniel Acker/Bloomberg News)

Morgan Stanley’s Worst-on-Street Bond Trading Sends Stock Lower

(Bloomberg) -- Morgan Stanley’s fixed-income traders succumbed to the same downturn that afflicted the rest of Wall Street in the fourth quarter, posting their worst results in three years and sending the shares tumbling.

Bond-trading revenue sank 30 percent to $564 million, the New York-based company said Thursday in a statement. The drop was the biggest of the five largest U.S. investment banks and well below the $823 million average estimate of analysts.

Clients spooked by extended bouts of volatility, especially during December, also left fixed-income operations reeling at Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co., which reported results earlier this week. Morgan Stanley blamed credit and rates products, but indicated the tone improved as 2019 got under way.

The shares are declining on “weaker-than-expected results coupled with the expectation coming in that they would be one of the better performers, not one of the worse performers,” Jeff Harte, an analyst at Sandler O’Neill & Partners, said in an interview.

Morgan Stanley dropped 3.5 percent to $42.93 at 1:53 p.m. in New York, the worst performance in the 68-company S&P 500 Financials Index.

Morgan Stanley’s Worst-on-Street Bond Trading Sends Stock Lower

“The market backdrop we saw in November and December has clearly been replaced by a more constructive tone” for the fixed-income business, Chief Financial Officer Jonathan Pruzan said in a telephone interview. He said even during the challenging period at the end of last year, the commodities operation had a good quarter.

Equities trading also trailed rivals, little changed from a year earlier while the firm’s competitors posted gains. Pruzan said that the firm’s equities result was roughly in-line with peers when excluding margin loan losses that many rivals took in last year’s fourth quarter. Wall Street firms including Bank of America Corp. were forced to book losses in 2017 on loans to Steinhoff International Holdings NV, a furniture retailer rocked by an accounting scandal.

“The pain of the fourth quarter’s challenging market conditions was felt broadly across the Morgan Stanley franchise,” Susan Katzke, an analyst at Credit Suisse Group AG, wrote in a note to clients.

Morgan Stanley’s merger-advisory work benefited from a dealmaking boom that pushed revenue from that business 41 percent higher to $734 million. That beat the average estimate of $605 million. Pruzan said the firm’s deal pipeline is healthy and confidence among corporate chief executive officers is good.

ROE Forecast

The firm said in a separate presentation that it was maintaining its previous guidance on return on equity, saying it expects the profit measure to hold between 10 percent and 13 percent in the medium term.

Chief Executive Officer James Gorman said on a call with analysts that Morgan Stanley has more opportunities for growth through hiring and potential acquisitions. He said he’s considering purchases for both wealth and asset management.

The investment-management division’s fixed-income offering is “smaller than we would like,” Gorman said on a call with analysts.

“There are a lot of spaces where we can add on,” Gorman said. “We’re not suggesting we’re about to do a mega-deal in asset management. You and I and everyone else knows those are complicated, and not all of those have been successful.”

Even as bond-trading sinks deeper into decline, big banks are setting records in other areas. They had already topped $100 billion in annual profit for the first time before Morgan Stanley reported results. Credit goes to the U.S. tax overhaul that cut levies on lenders, rising interest rates and a retail-banking boom.

Other key results:

  • Net income more than doubled to $1.53 billion, or 80 cents a share, from $643 million, or 26 cents, a year earlier, when the firm took a charge related to the U.S. tax overhaul.
  • Revenue fell 10 percent to $8.55 billion as the firm’s wealth-management unit posted a 6 percent decline.

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