[ by Howard Haykin ]

Morgan Stanley reported Q3 earnings that showed strength and solid performances in its major divisions, particularly fixed income, carried the firm to adjusted 3rd quarter earnings of $561 million, or 28¢ a share.  That beat Wall Street analysts who, on a consensus, anticipated profits of only 24¢ a share.

Yet, the earnings quickly morphed into a loss of $1 billion, or 55¢ a share when some  adjustments are booked - including a one-time charge related to its credit spreads.  Morgan Stanley produced adjusted net revenue of $7.6 billion, or $5.3 billion when the one-time charge is backed out.  Yet, analysts typically look at the former figure - i.e., earnings without one-time charges.

Positive Indications Despite the Mixed Numbers. Several results during the 3rd quarter provide optimistic trends for future performance.  

• "The rebound in fixed Income and commodities sales and trading indicates that clients have re-engaged after the uncertainty of the rating review in the previous quarter."
• "We are beginning to unlock the full potential of the global wealth management franchise, having increased our ownership of, and agreed on a purchase price for the rest of, Morgan Stanley Wealth Management.

-- CEO James Gorman, in a statement.

• While Morgan Stanley has had several rocky years, the firm has many of its rivals getting pinched by the same economic constraints. 
• And since since the "official close" of the financial crisis, regulators have placed additional burdens and requirements on all firms - all of which have reduced profitability for Wall Street firms. 
• For example, regulators lowered the amount of borrowings can be use to finance operations.  They've also bumped up the amount of reserves needed to "cushion" those higher-risk business areas.  Again, these tend to reduce the potential for banks and brokerages to generate profits.
• At the same time, Morgan Stanley has seen its credit ratings dropped by credit agencies - in most cases more so than its rivals.  This serves to increase the firm's cost of borrowing because lenders will require Morgan Stanley to pay higher interest rates and/or provide higher levels of quality collateral - that could have been used to generate profits if it did not have to be used to back-up the assurance that the firm would pay back the full principal of the loans its takes out.

Additional Positive Indications. Morgan Stanley Smith Barney, the firm's global wealth management division, posted net revenue of $3.3 billion, up slightly from the $3.26 billion it produced in the period a year earlier. Asset management reported revenue of $631 million, compared with $205 million in the year-ago period.

Then there was the excellent purchase price that Morgan Stanley had to pay for the remaining share of MSSB that it did not own - literally billions in savings, when compared to the amount the firm might have been required to pay.  It turned out to be based on both an objective computation as well as a subjective computation. 

For further details, go to:  [Dealbook, 10/18/12].