Two Big Investment Banks Report Drops in Quarterly Profit

September 23, 2004

Morgan Stanley and Bear Stearns posted drops in quarterly profit yesterday, surprising some investors one day after two other big investment banks reported a rise in earnings.

Morgan Stanley said that profit dropped by a third on lower bond trading revenue, weak equities results and higher expenses, falling short of Wall Street's low expectations and causing its shares to fall.

Net income fell to $837 million, or 76 cents a share, in the fiscal third quarter ended Aug. 31, down from $1.27 billion, or $1.15 a share, a year earlier.

The results disappointed investors after surprisingly strong results at Goldman Sachs and Lehman Brothers had given some investors hope that Wall Street would find a way to navigate difficult markets.

Morgan Stanley's chief financial officer, David Sidwell, told reporters that a rally in bonds this summer caught the firm off guard, hurting its fixed income and currency businesses.

The investment banking business made some gains in the quarter, with Morgan Stanley maintaining lead rankings in equity and equity-linked underwriting and in global initial public offerings. Still, banking income fell 20 percent, to $783 million, as the overall market shrank.

Shares of Morgan Stanley fell $3.66, to $48.72.

Morgan Stanley also disclosed that it reached a preliminary agreement with the New York Stock Exchange over failure to comply with prospectus delivery rules, employee misuse of funds and other matters.

The stock exchange confirmed that the company would pay a $19 million fine and face censure.

Bear Stearns posted fiscal third-quarter net income of $283.3 million, or $2.09 a share, compared with $313.4 million, or $2.30 a share, a year earlier. Last year, third-quarter profit included a gain of 38 cents a share from an investment.

Net revenue rose 3.3 percent, to $1.53 billion, but revenue in the capital market division fell 1.7 percent, to $1.2 billion.

Bear Stearns raised its quarterly dividend by 25 percent, to 25 cents a share. Its shares fell $2.14, to $87.95.



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