Bank Earnings: Morgan Stanley Sinks, Wells Fargo Soars

By Mike Caggeso
Associate Editor
Money Morning

Morgan Stanley (MS) posted its second consecutive loss, missed earnings estimates by a mile and slashed its dividend, while Wells Fargo & Co. (WFC) beat estimates with a $3.05 billion net income for the first quarter.

The separate earnings reports pushed and pulled investors who've been cheering first-quarter earnings from the banking sector.

Morgan Stanley posted a net loss of $578 million, or 57 cents a share, compared with a $1.4 billion profit in the first quarter of last year. Revenue came in at $3 billion, a 62% decline from a year ago.

Analysts surveyed by Reuters estimated the investment bank would post $4.9 billion in revenue and a loss of 9 cents a share.

"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 write-downs," Michael Holland, founder of New York money management firm Holland & Co., told Reuters.

Real estate accounted for $1 billion of Morgan's net losses, and a $1.5 billion more was tied to changes in the value of the bank's liabilities.

The carnage caused Morgan to slash its quarterly dividend 81% to 5 cents a share, a move the company said will save it $1 billion a year.

Chief Executive John Mack said last month in a conference that he didn't think now is the time to begin paying back the $10 billion it borrowed from the U.S. Treasury under the Troubled Asset Relief Program (TARP).

Meanwhile, fellow top-six U.S. bank Wells Fargo came through on its rosy outlook earlier this month, recording a 53% first-quarter profit on an increase of home refinances brought on by record low mortgage rates.

Net income was a record $3.05 billion, or 56 cents per diluted share, up from $2 billion, or 60 cents a share, a year earlier.

Wells Fargo's revenue nearly doubled to $21 billion, a figure helped greatly by more than $100 billion originated in mortgages in the quarter.

With the December acquisition of Wachovia Corp., Wells Fargo upped its exposure to serving about one out of every three U.S. households. But it also brought a truckload of risky adjustable-rate home loans. Wachovia topped all U.S. banks with $101.9 billion in losses and write-downs.

Wells Fargo's earnings report contrasted sharply with that of Morgan Stanley and the other four large U.S. banks - Citigroup Inc. (C), Bank of America (BAC), Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM).

The two investment banks of the six, Goldman Sachs and Morgan Stanley, don't have the more reliable revenue of mortgage loans, and instead are more dependant on the health of the stock market and overall global economic health - both which aren't expected to recover for at least another two quarters.

"Wells Fargo, in short, is becoming a model of what a nation should require of its behemoths under the too-big-to-fail doctrine. It does mostly conventional retail and corporate banking, and provides economically useful services to its nationwide network of clients. It takes few huge risks, and is emerging from 2008's disaster in pretty good shape," said Money Morning Contributing EditorMartin Hutchinson.

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