Morgan Stanley profit drops on legal expenses

By Tim Mullaney | USA TODAY | 17 Jan 2014 at 10:47 AM

Morgan Stanley said fourth-quarter profit dropped sharply because of a $1.2 billion addition to the firm’s reserves for legal settlements, while revenue climbed on stronger investment banking and stock trading.

Income from continuing operations was $192 million, or 7 cents a share, compared with income of $661 million, or 33 cents a share, for the same period a year ago. The settlement, which resolved litigation and investigations related to mortgage-backed securities, subtracted 40 cents a share from profit.

Revenue was $7.8 billion, after an accounting adjustment reflecting changes in the value of the firm’s debt. That’s slightly below the average analyst estimate of $8 billion, according to Thomson Reuters data. But revenue was $8.2 billion before the adjustment.

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“Our fourth quarter results demonstrated the consistency embedded in our business model, as revenues increased year-over-year in all three of our business segments,” Morgan Stanley CEO James Gorman said in a statement. “Importantly, we are continuing to address many of the legal issues from the financial crisis.”

The quarter’s weak spot was a decline in bond-trading revenue, a problem that also affected other investment banks during the quarter. Keefe Bruyette Woods analyst Brian Kleinhanzl said the bond trading profit missed by enough to cut Morgan Stanley’s profit by 16 cents a share.

The firm said most of its financial measures beat Wall Street expectations. Earnings per share from core businesses were 50 cents, beating estimates of 45 cents. Kleinhanzl said core earnings missed his estimate, however.

“We are pleased with the improved (revenue outlook) but the litigation reserve build is a concern,” he wrote in a note to clients.

Revenue beat expectations in investment banking, wealth management, and investment management, but fell short of forecasts in fixed income.

Morgan Stanley spokesman Mark Lake declined to say what matters the $1.2 billion is earmarked to resolve. The firm faces a number of lawsuits, most of them related to mortgage issues. Legal expenses have also figured into other banks’ fourth quarter results, including JPMorgan Chase’s $1.1 billion charge, most of which related to the bank’s failure to monitor or report suspicious activity by now-imprisoned Ponzi schemer Bernard Madoff, and Bank of America’s $2.3 billion pretax charge for mortgage issues.

Morgan Stanley shares rose in pre-market trading by less than 1%.