S&P Doesn’t See Morgan Stanley Downgrade On 2Q Report

Jun.18, 2008 in Market Outlook

Last Update: 6/18/2008 5:34:53 PM

By Jed Horowitz
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Morgan Stanley’s (MS) second-quarter earnings report on
Wednesday was panned by many analysts, but Standard & Poor’s Corp. said it won’t
trigger another ratings downgrade for the investment bank.

“We anticipated a poor quarter and fairly weak results for the balance of the
year,” said Scott Sprinzen, a senior analyst in S&P’s financial institutions
rating group. “Their reported results don’t change our thinking about the
rating.”

On June 2, S&P lowered Morgan Stanley’s credit one notch to A+, expressing
“concern that the pace and extent of earnings improvement could be considerably
more muted than we previously assumed.” It also downgraded Lehman Brothers
Holdings (LEH) and Merrill Lynch (MER) a notch to A.

S&P kept all three firms on negative outlook, meaning a further rating downgrade
is possible over the next few years.

Morgan Stanley’s second-quarter net income of $1.03 billion, or 95 cents a share,
was off 60% from a year earlier and was heavily influenced by pretax gains of
$1.4 billion on the sales of two business units. It also booked $90 million of
gains from marking down the value of its own debt securities.

“The quality of the earnings was very disappointing,” Sanford Bernstein analyst
Brad Hintz said in an emailed message. Excluding the sales and gains on its own
long-term debt caused by its credit problems, Hintz said Morgan Stanley would
have had earnings of four cents a share, well below analysts’ consensus estimates
of 92 cents.

The company said it suffered losses in several trading and investment areas in
its quarter that ended May 31, and also reported weak client activity in most of
its businesses.

Its disclosure that an apparently rogue London credit trader mismarked a trading
book, causing a further $120 million loss and raising questions about Morgan
Stanley’s risk-monitoring capabilities. Chief Executive John Mack has recently
re-jiggered risk management, attempting to beef up the area after backing away
from his previous aggressive pursuit of high-reward proprietary trading
activities.

“Our confidence is lower today,” Credit Suisse analyst Susan Katzke told clients.
“Positioning losses in several trading books and a mismarked trading position
after an overhaul of the risk-management organization are disappointing and
disconcerting.”

Sandler O’Neill analyst Jeff Harte said “no matter how we cut it, the bottom line
seems to be a fairly large revenue miss from continuing operations,” with
disappointing results in most businesses that went beyond Wall Street’s
balance-sheet problems.

On Tuesday, Goldman Sachs Group (GS) reported better-than-expected second-quarter
results and fewer slip-ups than its longtime rival. Goldman is the biggest Wall
Street bank with a market value of $72.04 billion, followed by Morgan Stanley at
$45.05 billion.

“Mack is making the changes needed for a different marketplace ahead,” wrote
Hintz, a former Morgan Stanley finance executive, “but as a former MS partner,
its a bitter medicine watching Goldman pull away from the firm in these markets.”

Did you like this? If so, please bookmark it,