The loss, the third in six quarters for the investment bank and brokerage, disappointed investors who were hopeful after rival Goldman Sachs Group Inc
I guess this shows not all banks are alike. It looks like (Chief Executive) John Mack took less risk and missed out on a chance to pick up some trading revenue, said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.
Morgan posted a net loss applicable to common shareholders of $578 million, or 57 cents a share, for the first quarter, compared with shareholder income of $1.31 billion, or $1.26, in the comparable period last year. Analysts on average expected a loss of 9 cents a share, according to Reuters Estimates.
The bank cut its quarterly dividend by 80 percent to 5 cents a share from 27 cents. The move will save the bank $1 billion a year.
We remain cautious, Chief Financial Officer Colm Kelleher said in an interview, though he stressed Morgan has more than enough capital and cash to go back on offense.
We're ready to go when we see risk-adjusted returns, he said. We've made no secret 2008 was hugely challenging for the industry and 2009 we always saw as a year of transition. An extra three months of being safe to me is not a mortal sin.
First-quarter revenue fell 62 percent to $3.0 billion as improvement in core investment banking and trading businesses were erased by losses.
Morgan, one of the world's largest commercial real estate investors, recorded $1 billion of net losses on commercial real estate, an area widely seen as a source of new writedowns for banks and insurers.
It is my single biggest worry, Kelleher said.
Morgan also took a $1.5 billion accounting loss on certain of its own debt, reflecting the rising value of Morgan credit this year.
The same fair-value accounting rules bolstered its results when markets were tumbling and its bonds were under pressure. Morgan booked $3.5 billion of revenue in the fourth quarter, $900 million in the third quarter and $1 billion a year ago.
Institutional securities businesses generated revenue of $1.7 billion in the first quarter. Fixed-income trading revenue was $1.3 billion, while equities trading generated $900 million. Investment banking brought in $812 million in the quarter, a period when Morgan was the leader in announced mergers and acquisitions worldwide.
The first-quarter results were the first since Morgan, which became a bank holding company in September, adopted a calendar year reporting schedule. In December, a month that was not included in either the first-quarter or its fiscal fourth-quarter results, the bank had a net loss applicable to shareholders of $1.6 billion.
Morgan's fixed income sales and trading revenue dropped 58 percent to $1.3 billion, in contrast to Goldman Sachs, which last week said it had more than doubled revenue from these activities to $6.56 billion.
People had expected the credit desk trading profits to be a pleasant surprise, and I think they were OK, but they were just overwhelmed by the negative surprises in the writedowns, said Michael Holland, founder of New York money management firm Holland & Co.
Yet Morgan's Kelleher noted the bank took a lot less risk than Goldman.
Morgan's value at risk, a popular measure of possible daily losses, was $115 million, compared with Goldman's $240 million. Morgan's value at risk rose 16 percent from last year, while Goldman's rose 52 percent.
One key trouble spot for Morgan, though, remains its large commercial real estate exposure. Morgan estimates that if every asset in its commercial mortgage portfolio as of March 31 defaulted and it recovered nothing, potential losses would reach $4 billion.
Brokerage house Fox-Pitt Kelton estimated that commercial real estate represented 23 percent of the loans of banks it covers. Bad real estate investments were a major factor in Lehman Brothers Holdings Inc's demise in September.
Morgan shares were down $1.30, or 5.3 percent, to $23.32 in afternoon trade on the New York Stock Exchange after falling as low as $22.36 earlier. The shares fell by half over the last 12 months but have surged about 40 percent this year.
The bank's results included a tax benefit of 33 cents a share from the anticipated repatriation of overseas earnings at lower-than-estimated tax rates.
Kelleher said the bank is ready and able to repay the $10 billion of taxpayer funds received under the government's Troubled Asset Relief Program, pending a go-ahead from regulators and the results of a stress test administered to the top 19 U.S. banks, including Morgan. Executives at Goldman and JPMorgan have been very public in discussing their eagerness to repay TARP funds as soon as possible.
Kelleher played down talk that Morgan Stanley was on the prowl for a consumer bank. To the extent Morgan would make acquisitions, it will focus on the high net worth portions of its wealth management business, he said on a conference call.
(Additional reporting by Dan Wilchins, Elinor Comlay and Juan Lagorio; Editing by John Wallace)