Morgan Stanley reported net income to common shareholders of $984 million, or $0.49 per diluted share, on $8.2 billion of net revenue for the first quarter of 2013. Excluding a $317 million noncash debt valuation adjustment, the company would have reported net revenue of $8.5 billion and income from continuing operations of $0.61 per diluted share. The company’s annualized return on average common equity excluding DVA was 7.5%. We are maintaining our economic moat rating and don’t anticipate making a material change to our fair value estimate.
Net revenue excluding debt valuation adjustments decreased 5% from the previous year and increased 13% sequentially. The primary reason for the decrease in revenue from the previous year was an approximately $1 billion, or 42%, decline in fixed-income and commodities trading revenue to $1.5 billion. The 42% decline is quite steep, but the $1.5 billion of fixed-income and commodities trading revenue is actually approximately 13% higher than our calculation of the company’s trailing-two-year fixed-income and commodities trading revenue after excluding DVA and other unusual items.
While the company’s results are in line with its recent history, it appears to have underperformed peers like Goldman Sachs GS , which reported first-quarter fixed income trading revenue that was more than double Morgan Stanley’s and only a 7% decline from the previous year. While it is the returns on capital that is the primary determinant of where Morgan Stanley’s shares should trade relative to its book value, lower absolute trading revenue compared with peers may mean that the company is subscale in certain products.
Morgan Stanley’s wealth management business is right on track to meet its midteens operating margin goal in 2013. Revenue and operating margins were both flat sequentially at $3.5 billion and 17%, respectively. The interesting point about the operating margins, though, is that from the fourth to the first quarter, the wealth management segment’s compensation ratio increased to 60% from 57%, as we were anticipating, but the noncompensation expense ratio decreased to 23% from 26%. The lower level of noncompensation expenses suggests increased operating leverage in the segment.
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