Morgan Stanley Misses on Loan Markdowns

Investment banker Morgan Stanley said Wednesday its Q3 net income fell 17% to $1.45 billion ($1.44/share), compared to $1.85 billion ($1.75/share) in Q3 2006, falling short of analyst targets of $1.54/share. Revenue was up 13% to $7.96B from $7.06B, short of the $8.35 billion analysts were expecting. The company took a $940 million charge for loan writedowns in the quarter, dropping its EPS by $0.33/share: "The markdowns reflect the illiquidity created by current market conditions," it said. The earnings drop is the firm's first since CEO John Mack took the reins in 2002, and comes on the heels of Lehman Brother's 3% drop on Tuesday. CEO John Mack spoke of the "impact of the severe market disruption on some areas of the firm -- including our credit products, leveraged lending and quantitative strategies businesses" (see full earnings call transcript later). Fixed-income trading revenue fell 3%, its first drop since 2005, as fallout from subprime mortgage defaults is taking a toll on firms who deal in securities backed by residential properties. "Everything's slowing... All of these firms are choking on the same issues," Jon Fisher of Fifth Third Asset Management commented. Investment banking continues to be strong: revenues were up 45% to $1.4 billion. Morgan Stanley ranked #1 in global completed M&A in the quarter. Shares are down 1.3% in pre-market trading; they have lost 22.6% over the past three months.

Sources: Press release, MarketWatch, Bloomberg, AP, Wall Street Journal
Commentary: Stock Lending in U.S. Investment Banks • Is Competition a New Risk Factor in Morgan Stanley's World? • It's Too Late To Short The Financial Sector
Stocks/ETFs to watch: MS. Competitors: GS, MER, LEH, BSC. ETFs: KCE, IAI, EXB

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