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Morgan Stanley CFO: Companies 'very cautious'

Thursday - 4/18/2013, 6:49pm  ET

In this Wednesday, Oct. 10, 2012, photo, people pass Morgan Stanley's headquarters in New York. Morgan Stanley reports quarterly financial results before the market opens on Thursday, April 18, 2013. (AP Photo/Richard Drew)

AP Business Writer

NEW YORK (AP) -- After getting bludgeoned in the financial crisis, Morgan Stanley is staking its future on the steadier, if less spectacular, business of wealth management.

In the first quarter, the strategy looked prudent: Profit and revenue soared in wealth management, even as they dipped in investment banking.

The wealth management unit generated more fees, and clients shuttled more assets to the bank. Profit margins rose and so did employees' productivity. In contrast, the company's investment banking unit brought in less revenue from trading bonds and commodities, and made less money on advising companies on mergers and acquisitions.

Overall earnings slipped 12 percent from a year earlier -- to $1.2 billion, or 61 cents a share. While that beat expectations of analysts polled by FactSet, investors weren't impressed. The stock fell $1.16, or 5.4 percent, to close at $20.31 Thursday.

CEO James Gorman said the first quarter represented "solid momentum." He's been investing in the wealth management unit, emphasizing products like home loans, and steering the purchase of the rest of Morgan Stanley Smith Barney, the retail brokerage it owns with Citigroup.

Analysts, however, described the first quarter almost like a holding period. They said the bank was moving toward the correct positions but were disappointed by weaknesses in the investment bank. They're also anxious for the Morgan Stanley Smith Barney deal to be completed.

Gorman, the CEO since the start of 2010, is under pressure to restore Morgan Stanley's share price and measures of profitability, including its return on equity. His direction for the bank is borne from previous losses: Risky investment banking activities slammed Morgan Stanley in the financial crisis, and regulators are phasing out some of the investment bank's old sources of revenue, like trading for its own profit.

The CEO's response has been to expand the bank's work with individual investors. That business can provide a steady source of revenue even when financial markets are volatile. It also gives the bank more earnings power and access to deposits, which helps it fund lending and other initiatives.

A big part of that plan is the retail brokerage, Morgan Stanley Smith Barney. Morgan Stanley is in the process of buying out Citi's remaining 35 percent stake. It has said it plans to do so by the end of this year, though it still needs Federal Reserve approval for part of the process.

The bank's different units are also being encouraged to work together. For example, the investment bank usually deals with companies and other institutional clients, helping them broker deals or trading on their behalf. But those corporate clients also have executives who would make prime customers for the wealth management unit, which advises individuals as well as small and medium-sized companies.

Thursday's results reinforced the shifting focus. The wealth management unit accounted for about 41 percent of revenue, after stripping out an accounting charge. Three years ago, when Gorman took over, it accounted for 34 percent.

Wealth management's profit margins and income tend to be more reliable and steady. Analysts said they were pleased that the wealth management unit's pre-tax profit margin was better than expected at 17 percent. That's the highest it's been since Morgan Stanley formed the joint brokerage with Citigroup, and it's been steadily rising since 2009. The investment bank's profit margin was higher, at 20 percent, but it's swung widely in recent years: 39 percent three years ago, and 12 percent two years ago.

Nomura analyst Glenn Schorr said the quarter "showed progress."

"A mixed bag at the (investment bank) isn't so bad," he wrote in a note to clients, "when wealth management is so much better (and about to be bigger)."

Barclays analyst Roger Freeman noted that the return on equity rate was down over the year -- "a sign of progress yet to be made, though with important catalysts on the horizon," he wrote.

More from the earnings report:

--The economy: Executives sounded cautiously hopeful about the economy, but were far from declaring victory. In an interview with The Associated Press, Chief Financial Officer Ruth Porat said that institutional investors had been more confident in January and February, then pulled back in March amid the Cyprus bank bailout and Italy's uncertain elections. It was a trend seen with clients at Goldman Sachs, which reported first-quarter earnings Tuesday.

Porat said the market's uneven performance in recent weeks is another reminder that the recovery "may not come in a straight line," even if major economies "are clearly on firmer footing than just a year ago."

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