Morgan Stanley on Wednesday reported third-quarter profit sank 17 percent, as the No. 2 U.S. investment bank was hurt by a global credit crisis and spun off its credit-card unit Discover.
Morgan Stanley, like others on Wall Street, was squeezed during the quarter as borrowers with poor credit histories defaulted on home-loan payments at a rising rate. This curbed investor appetite for everything from mortgage-backed bonds to loans for corporate buyouts, and triggered volatile conditions for stocks.
John Mack, Morgan Stanley's chairman and chief executive, pinned the quarter's poor performance on the "impact of the severe market disruption on some areas of the firm."
Profit for the three months ended Aug. 31 fell to $1.54 billion (EUR1.11 billion), or $1.44 per share, from $1.85 billion, or $1.75 per share, in the year ago period. This year's third quarter included only one month of results from Discover Financial Services, which split from Morgan Stanley in June.
Stripping out profit from the credit-card unit, profit fell 7 percent to $1.47 billion (EUR1.06 billion), or $1.38 per share, from $1.59 billion, or $1.50 per share.
Stronger investment banking fees, largely from deals announced well before the third quarter, helped drive revenue up 13 percent to $7.96 billion (EUR5.74 billion) from $7.06 billion a year earlier.
However, that still was not enough to beat Wall Street projections for a profit of $1.54 per share on $8.35 billion (EUR6.02 billion) of revenue, according to analysts polled by Thomson Financial.
The company said it saw losses of $940 million (EUR677.9 million) in the quarter from the decreased market value of loans on its books as well as other financing commitments. Those losses cut 33 cents per share off of its bottom-line results.
Quantitative investments, which use computer models to automatically decide when to buy and sell stocks, were also a problem across Wall Street this summer. Morgan Stanley pegged its quantitative trading losses at $480 million (EUR346.1 million) during the quarter.
Investment banking was among the bright spots; revenue from the business surged 45 percent to $1.4 billion (EUR1.01 billion).
Morgan Stanley is the second of four investment banks to report results this week. On Tuesday, Lehman posted a decline in profits that was smaller than had been expected. Goldman Sachs and Bear Stearns report their results on Thursday.
Mack, who returned as CEO in mid-2005, was given a mandate to help put the investment bank on track after languishing just a few years ago. Among his biggest objectives was to increase the company's prime brokerage and asset management business, and expand investment banking operations both in the U.S. and overseas.
This was Mack's first quarter since coming back where profit fell, though asset management recorded its fourth consecutive quarter of inflows and its global wealth management business delivered its sixth consecutive quarter of improved performance.
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