Morgan Stanley reported that its earnings rebounded robustly in the third quarter. The bank posted a loss of $1.01 billion, or $0.55 a share, for the third quarter. The loss was primarily due to the company incurring a $2.3 billion charge on the perceived improvement in its debt.
If the accounting charge is excluded, Morgan Stanley earned $561 million, or $0.28 a share, in the quarter. This was better than the $0.02 per share earned in the year-ago quarter and $0.04 better than analysts’ expectations. Morgan Stanley produced adjusted net revenue of $7.6 billion, or $5.3 billion when excluding the one-time charge.
Moody’s downgraded Morgan Stanley two notches to Baa1 in June. Ratings downgrades are bad news for any financial institutions that depend on the confidence of their creditors and the companies they are trading with. The downgrade was not as far as some had feared and resulted in skittish clients returning to doing business with the company, causing a bump in business in the most recent quarter.
James P. Gorman, chairman and chief executive of Morgan Stanley, said, “On a tactical front, our objective this quarter was to demonstrate a recovery from the challenging second quarter. Clients did re-engage with us at the end of the second quarter and continued to do through the third quarter.”
The bank showed steady gains in most of its business lines. In the institutional securities division, the company posted revenue of $3.6 billion excluding the debt charge, compared with $3 billion in the year-earlier period. This division is a big generator of revenue and includes the company’s investment bank, as well as stock and bond trading. Before the financial crisis, the institutional securities division posted adjusted revenue of $4.6 billion for the third quarter of 2007.
New regulations have required Morgan Stanley to exit or reduce its presence in certain capital-intensive businesses, reducing revenue. The downgrade by Moody’s has also required the company to build up its capital cushion against certain businesses, reducing its overall returns. While an improvement over recent periods, the quarter highlighted the issues the company still faces in its struggle to transform itself after the financial crisis.