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Pruning risks may cut into profits at Morgan Stanley

Pruning risks may cut into profits at Morgan Stanley

New York: Late last year, after the financial crisis, Morgan Stanley made a decision that its biggest rivals avoided: Burnt by the crisis, it would take far fewer risks in its trading.

That decision is costing it—at least for now.

Unlike Goldman Sachs Group Inc. and JPMorgan Chase and Co., which quickly returned to profitability by taking on risk in trading for their customers, Morgan Stanley’s earnings from those operations will be less in the second quarter.

As a result, these profits will not be high enough to offset some unusual charges and expenses, and Morgan Stanley is expected to post a loss for the quarter, while its Wall Street rivals post robust quarterly profits.

Analysts say Morgan Stanley’s expected second quarter loss is not a cause of major concern, given the circumstances. But the contrast between its performance and others underscores how strategic decisions made during the financial crisis are playing out.

Morgan Stanley is expected to report a loss of at least $400 million, according to analysts’ estimates.

The reasons are a combination of lower trading profits than its rivals and higher charges. Those charges include $892 million (around Rs4,263 crore) the bank incurred when it joined its Wall Street brethren in repaying taxpayer support.

Much more is likely to be caused by an accounting rule that requires banks to book losses on improvements in credit spreads, which act as an indication of investor confidence in the creditworthiness of a bank.

Now that the financial system is healing, Morgan Stanley and others must record losses as their credit spreads improve because they are deemed more likely to pay off all their debt. That charge at Morgan may be as high as $1.8 billion this quarter, according to Howard Chen, an analyst at Credit Suisse, who wrote in a report this week that Morgan has $4.1 billion in possible charges in future quarters related to its credit spreads alone.

Over the long term, Morgan Stanley’s decision to pare risk and expand its footprint in wealth management may remake the company to look quite different from its traditional rivals and to produce long-term, stable profits. Morgan executives acknowledge they have been cautious in areas such as fixed income. But reducing risk can also cut into profits.

Of the 10 large banks that returned the bailout money, Morgan Stanley is one of two that analysts expect to lose money in the quarter, according to Thomson.


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