(Bloomberg) -- Morgan Stanley, owner of the worlds largest brokerage, reported profit that beat analysts estimates as equity-trading revenue increased and earnings from wealth management climbed to a record.
Fourth-quarter net income fell to $181 million, or 7 cents a share, from $594 million, or 29 cents, a year earlier, the New York-based company said today in a statement. Profit was 50 cents a share excluding an accounting charge tied to the firms own debt, a tax benefit and legal expenses, beating the 44-cent average estimate of 26 analysts surveyed by Bloomberg.
Morgan Stanleys stock climbed 64% in 2013, the most among the 10 largest global investment banks, as Chief Executive Officer James Gorman cut costs and improved margins at the brokerage unit. A 30% jump in the Standard & Poors 500 Index helped boost equity trading and wealth-management revenue.
Morgan Stanley is a little more levered toward the equity-centric businesses than competitors, Devin Ryan, a bank analyst at JMP Group in New York, said before the results were announced. Theres positive momentum in those businesses going into 2014.
The companys $1.2 billion addition to legal reserves in the fourth quarter pertained to mortgage-related matters, specifically litigation and investigations related to residential mortgage-backed securities and the credit crisis, according to the statement.
We are continuing to address many of the legal issues from the financial crisis, Gorman, 55, said in the statement. We look forward to further progress on our strategic goals as we move into 2014 with strength and momentum.
SHARE PERFORMANCE
Morgan Stanley rose to $32.37 in New York trading at 8:29 a.m. from $32 yesterday. The shares have more than doubled since June 2012, and through yesterday were 8.1% above the price when Gorman took over at the end of 2009.
Revenue excluding accounting adjustments rose to $8.2 billion from $7.47 billion a year earlier. Book value per share climbed to $32.29 from $32.13 at the end of September.
The firms return on equity excluding the accounting charge was 5.1% for the year, unchanged from 2012. While Morgan Stanley achieved its goals on cost cutting and reducing capital used by the trading business, the firm hasnt reached its target of doubling ROE, a gauge of profitability.
Gorman said in May that the bank can post a 10% ROE by this year if regulators allow it to return a reasonable amount of capital to shareholders. The company announced a $500 million stock buyback in July. It repurchased $228 million of in the fourth quarter, bringing the yearly total to $350 million.
ACCOUNTING CHARGE
The accounting charge is known as a debt-valuation adjustment, or DVA. It stems from increases in the value of the companys debt, on the theory it would be more expensive to buy it back. The firm had a $368 million charge from DVA, versus a $511 million charge in the fourth quarter of 2012.
Pretax profit from global wealth management,
Morgan Stanley today set a margin target of 22% to 25% for the fourth quarter of 2015, assuming no change in interest rates or market levels. The bank is targeting a 70% loan-to-deposit ratio next year, up from 55% in 2012, as it uses deposits from brokerage clients for products such as mortgages and corporate lending.
EQUITY TRADING
The increase in asset prices globally in 2013 has helped boost performance at the brokerage, which generates more than a third of revenue from fee-based accounts that often earn a percentage of assets. Rising stock indexes have also benefited Morgan Stanley, which is the only Wall Street firm to generate more revenue from equity trading than fixed-income trading.
In equities trading, headed by Ted Pick, Morgan Stanleys revenue rose 7% from a year earlier to $1.5 billion, excluding DVA. That compared with $904 million at Bank of America Corp. and $1.73 billion at Goldman Sachs Group Inc. UBS AGs Brennan Hawken had estimated equities revenue of about $1.58 billion, while Wells Fargo & Co.s Matt Burnell predicted $1.43 billion.
Morgan Stanley topped all global investment banks in equity-trading revenue in the third quarter. The firm is now seeing an acute battle for equity traders, Colm Kelleher, head of the investment bank and trading division, said last month.
FIXED-INCOME SALES
Fourth-quarter revenue from fixed-income sales and trading, run by Michael Heaney and Robert Rooney with commodity trading co-heads Colin Bryce and Simon Greenshields, fell 14% to $694 million, excluding DVA. That compared with estimates of $919 million from Wells Fargos Burnell and $800 million from UBSs Hawken.
Fixed-income revenue was $1.89 billion at Goldman Sachs and $2.33 billion at Citigroup Inc.
Morgan Stanley exited some units within its fixed-income and commodities division and shrank capital dedicated to that segment. It had $210 billion of risk-weighted assets tied to the division at the end of December. The bank moved up its target for driving that number below $180 billion by one year, to 2015.
Morgan Stanleys head of interest-rates trading, Glenn Hadden, left earlier this month after two years with the firm. He said he had different views over how the business should be run than Heaney and Rooney, who took over leadership of the fixed-income division last year. Mitch Nadel and Jakob Horder were named to replace Hadden.
COMMODITY RESTRICTIONS
The Federal Reserve is weighing further restrictions on banks trading and warehousing of physical commodities as Congress scrutinizes potential conflicts of interest and manipulation in those markets. The central bank said recent accidents and natural disasters have increased concerns about the businesses.
Morgan Stanley agreed last month to sell a unit that stores, trades and transports oil products to a subsidiary of Russias OAO Rosneft. The firm also said its exploring strategic options for its stake in TransMontaigne Inc., the Denver-based petroleum and chemical transportation and storage company.
Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.36 billion in fourth-quarter revenue. That figure, up 11% from a year earlier, included $451 million from financial advisory, $416 million from equity underwriting and $495 million from debt underwriting.
Morgan Stanley was the second-ranked adviser on global announced mergers and acquisitions in 2013, according to data compiled by Bloomberg. It was the No. 3 underwriter of global equity, equity-linked and rights offerings, the data show.
Asset management reported a pretax gain of $337 million, compared with $221 million in the previous years period.
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