Will These Results Raise Eyebrows on Wall Street?

Increases in wealth management and investment banking pushed Morgan Stanley’s (NYSE:MS) fourth-quarter earnings above analysts’ expectations. But despite these positives, the results revealed continued problems in the firm’s business.

For the fourth quarter, Morgan Stanley reported a profit of $481 million, or 25 cents per share, compared to a loss of 15 cents per share in the year-ago quarter, but the firm’s results included one-time accounting charges stemming from its credit spreads. Fourth-quarter charges also affected the firm’s revenue, which came in at $7 billion for the three-month period, an increase of 23 percent from the same quarter last year.

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However, when the charges were excluded, Morgan Stanley had a profit of 45 cents per share, beating the 27-cents-per-share profit analysts polled by Thomson Reuters had predicted.

While Morgan Stanley’s quarterly results showed improvement year-over-year, revenue fell 19 percent to $26.1 billion for the full year. In comparison, its rival Goldman Sachs (NYSE:GS) reported that annual revenue increased 19 percent in 2012…

This decrease has negative implications for Morgan Stanley. Because revenue decreased for the year, the percentage the firm spent on employee compensation rose to $15.62 billion, or 60 percent of its 2012 revenue. This figure, reported The New York Times, “could raise eyebrows on Wall Street.” In 2010, Morgan Stanley reported a similarly high 62 percent compensation ratio that chief executive James P. Gorman called “historic,” according to the publication. He also added that the rate should never be higher than 50 percent.

Despite the high compensation ratio, Gorman said in the earnings press release that the firm had reached a “pivot point“ in its turnaround strategy, which began after Morgan Stanley’s business took a hit in the financial crisis. Since then, he has made efforts to shift the firm away from risky operations like trading toward steadier businesses like wealth management. In fact, the wealth management unit was one of the bank’s stronger units in the fourth quarter. The unit’s net revenue rose to $3.46 billion from $3.22 billion in the year-ago quarter, and its pre-tax margin hit 17 percent.

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