10:12 a.m. | Updated
Morgan Stanley reported adjusted earnings for the fourth quarter on Friday that beat analyst estimates, driven by gains in wealth management and investment banking.
Including charges, the firm had a fourth-quarter profit of $481 million, or 25 cents a share. That compares with a per-share loss of 15 cents in the year-ago period.
The results, however, show continued weakness in firm’s fixed income franchise and were affected by one-time accounting charges related to the firm’s credit spreads. Excluding those charges, the firm had a profit of 45 cents a share. That handily beat the estimates of analysts polled by Thomson Reuters, which had estimated a profit of 27 cents a share.
When factoring in the charges, Morgan Stanley’s revenue came in at $7 billion in the fourth quarter, up 23 percent from the year-ago period. But for the full year, the firm’s revenue dropped 19 percent, to $26.1 billion, a significant drop that contrasts with peers. Goldman Sachs, for instance, said its annual revenue rose of 19 percent in 2012.
As a result, Morgan Stanley was forced to increase the percentage of revenue it allots for compensation: a full 60 percent of its 2012 revenue, or $15.62 billion, went to pay employees. This compares with 2011, when just 51 percent of revenue was allotted for compensation and benefits.
The high ratio could raise eyebrows on Wall Street. In 2010, Morgan Stanley’s chief executive, James P. Gorman, sai! d that the firm’s compensation rate of 62 percent that year was a “historic high†that no one on his management team “will ever see again.†He indicated that the rate should be no higher than 50 percent.
Still, Mr. Gorman said on Friday that Morgan Stanley’s turnaround strategy, which has been underway since the financial crisis when the firm’s operations were badly damaged, was working. “We believe Morgan Stanley is at a turning point,†he told analysts on a conference call to discuss earnings.
Mr. Gorman has been working since the financial crisis to retool Morgan Stanley by shifting its focus away from potentially riskier businesses like trading and into steadier, less capital-intensive areas like wealth management. While he has notched some successes, the company still faces challenges.
Notably, the firm has reduced the size of its fixed-income department in the wake of ratings downgrades and new regulatory requirements, both of which have forced it to hold more capitl against riskier trading activities, reducing profitability. This month, it laid off 1,600 employees, many of them in fixed income.
But there were areas that had notable revenue growth. Excluding the debt charge, institutional securities, which included fixed income and banking, had revenue of $3.5 billion, compared with $1.9 billion in the same quarter in 2011.
The fixed-income sales and trading unit reported adjusted revenue of $811 million for the fourth quarter, compared with a loss of $493 million in the year-ago period. Investment banking revenue also did well, increasing 25 percent, to $1.23 billion, in the fourth quarter.
Wealth management was another bright spot in the quarter, posting net revenue of $3.46 billion, up from $3.22 billion this time last year. Its pretax margin was 17 percent, which is higher than many analysts had anticipated.
Investors seem to like results, driving the company’s stock up nearly 6 percent, to $21.98, in morning trading.
Earl! ier this ! week, Goldman Sachs posted profit of $5.60 a share, which outpaced analyst expectations. Citigroup, Wells Fargo and JPMorgan Chase have also recently reported stronger year-over-year earnings.
