Morgan Stanley’s revenue fell sharply in the second quarter, dragged down by weak results from its investment banking unit. Its net income missed Wall Street expectations, and its stock dropped sharply.
The bank brought in 24% less revenue overall, but the decline was especially evident in investment banking, where revenue plunged 37%.
In that unit, revenue from advising businesses was down by half. Bond and commodities sales and trading was down by nearly 60%. Stock sales and trading fell nearly 40%.
In a statement, CEO James Gorman described the April-June period as “an environment marked by investor caution.”
The bank earned $564 million for the quarter, a swing from a loss of $558 million in the same period last year. In last year’s second quarter, Morgan took big charges so it could cut down on expensive dividend payments to Mitsubishi UFJ Financial Group, a Japanese financial firm that gave the bank a life-sustaining cash infusion in the depths of the 2008 financial crisis.
Earnings came to 29 cents per share, lower than the estimate of 32 cents from analysts surveyed by FactSet, a data provider.
Morgan Stanley stock was down 68 cents, or 4.9%, to $13.99 in premarket trading. The stock was above $30 as recently as February 2011.
The revenue decline is an unwelcome trend for Morgan Stanley, but one it shares with most of its peers.
Bank of America, Citigroup, JPMorgan Chase and Goldman Sachs all reported lower revenue. Only Wells Fargo reported higher revenue, mostly because it issued more mortgage loans.
Besides Wells Fargo, the five other banks rely heavily on their investment banking units, which can offer spectacular gains in good times but carry more risk in a weak economy and when financial markets are choppy.
The results also underscore why Gorman is so eager to buy up the rest of Morgan Stanley Smith Barney, the retail brokerage that Morgan Stanley owns with Citigroup. Morgan Stanley wants to raise its stake to 65% from 51% and is haggling over a price with Citi.
As for Bank of America, the bank said Wednesday that investor disputes over bad mortgages and mortgage-backed bonds have more than doubled from a year ago.
BoA beat Wall Street’s profit expectations for April through June, and executives emphasized that the bank is setting aside less money for bad loans overall, a sign that more customers are paying back loans on time.
But the growing investor claims suggest the mortgage problem, which has already cost the bank more than $13 billion, is growing.
“It’s certainly a lot of bad news,” said Guy Cecala, CEO and publisher of the trade publication Inside Mortgage Finance. “The mortgage banking business of most major banks now is turning into a big profit centre.”
The claims are from investors who bought mortgages or mortgage-backed bonds from Bank of America before the 2008 crisis. Investors have claimed that Bank of America and other banks misled them about the quality of the mortgages.
The banks have been forced to buy back some of those mortgages after investors threatened to sue.
The bank swung to a $2.1 billion profit after it slashed jobs and other expenses. In last year’s second quarter, the bank lost $9.1 billion, largely because it had to pay $8.5 billion to settle claims from mortgage investors.
The stock rose briefly before the market opened, then sank all day. It closed down 39 cents, or 4.9%, at $7.53.
Outstanding claims from mortgage investors jumped to nearly $23 billion from $10 billion a year ago, led partly by new claims from Fannie Mae, the government-sponsored mortgage lender.
Bank executives said they believe many of the new claims from Fannie Mae are not valid. Fannie Mae’s standards for submitting claims “continue to be inconsistent with their own past conduct and our interpretation of our contractual obligations,” the bank said in a presentation for analysts.
Bruce Thompson, the chief financial officer, said the bank expects the outstanding claims to grow. The process for resolving them, he said, “continues to evolve, and does remain unclear.”
Bank of America, based in Charlotte, N.C., became a major player in the mortgage market in 2008, after it bought California mortgage lender Countrywide Financial.
But Countrywide, known for making exotic mortgages, has drawn regulatory fines and made the bank a target for angry homeowners. Bank of America’s mortgage unit has not turned an annual profit since 2007.
The fact that many other lenders that churned out questionable mortgages are now out of business doesn’t help Bank of America, said Cecala, from Inside Mortgage Finance.
“Bank of America is going to remain a big target,” Cecala said, “because they’re still around and they still have money.”