Investment bank Morgan Stanley has released figures showing that its second quarter profits have fallen as a result of a slump in trading activity.
The information points towards company profits halving, causing them to miss many analysts’ expectations, even though they had been somewhat diminished by the drop in trade volumes.
In the three months ending in June, Morgan Stanley reported a net income of $563 million, a poor showing compared to the $1.22 billion seen in the same period the year before. After a comparatively good set of first quarter results, it seems that many investors will be left disappointed.
The drop in performance has largely been blamed on the difficulties of coping with lower trading volumes, a scarcity of large capital market deals, worries over new financial regulations and the downgrading of the banks credit rating by Moodys.
The downgrading hit a number of large and influential banks, but Morgan Stanley bore much of the brunt, being downgraded from A2 to Baaa1, only three notches above ‘junk.’ The downgrading had a knock on effect across markets, as traders anticipated the brutal hammering of fifteen of the world’s largest banks by the rating agency and responded accordingly.
The news comes at the time when many other large investment institutions and hedge funds such as Louis Bacon's Moore Capital Management , Tudor Funds and Harbinger Capital Partners have all returned positive results for their investors through bullish approaches.
Morgan Stanley, however, has been attempting to rectify the difficulties it has been facing under the leadership of James Gorman, the chief executive. A concerted effort to reduce costs has been initiated, with the bank also hoping to limit its dependence on volatile trading and investment banking revenue. A large part of this process has been the expansion of its wealth management business through deals with Citigroup, which Morgan Stanley sees as key to ensuring a stable future.
Things could have been much worse for the industry giants had it not been for an accounting quirk that flattered profit figures in an unexpected way. Due to certain rules that changed the way Morgan Stanley’s debt was valued, the company was able to turn a small profit, where otherwise it would have struggled. This was seen across a number of banks, including Bank of America, Citigroup and JP Morgan Chase, all of which saw their profit margins flattered by administrative accounting quirks that pushed profits beyond many experts’ expectations.
The future for Morgan Stanley largely remains uncertain, as credit rating downgrades, the developing eurozone crisis and increased pressure from regulators all take their toll. Such uncertainty is always bad for business, and is alleged to have cost the bank’s bond trading division an estimated $225 million, as clients erred on the side of caution and took a ‘wait and see’ approach to investment.