NEW YORK (AP) — Morgan Stanley said Wednesday it lost more than $1.2 billion in the second quarter as it took charges to cover continuing losses in its real estate investments and its repayment of government bailout money.

The investment bank said Wednesday it was also hurt for a second straight quarter by an accounting charge related to the rising value of its own debt.

Analysts said that while Morgan Stanley’s investment banking revenue was strong, its conservative approach to trading hindered its ability to offset the special charges.

“They have come out (in recent quarters) to say they are taking a more balanced approach to trading,” said Mark Lane, an analyst with William Blair & Co.

Evidence of its caution could been seen in Morgan Stanley’s capital ratios, which are among the strongest in the sector, Lane said. Higher capital ratios indicate Morgan Stanley is holding more cash in reserve and not betting on riskier assets like competitors include Goldman Sachs Group Inc.

Aite Group senior analyst John Jay said Morgan Stanley’s approach could be beneficial if the market dips again because the bank would be less exposed to the downturn. However, it also means smaller profits when markets are strong.

“Because they took a more conservative stance up to this point, others look a little better,” Jay said.

Morgan Stanley said its net loss after paying preferred dividends was $1.26 billion, or $1.10 per share, during the quarter ended June 30. The New York-based bank earned $1.06 billion, or $1.02 per share, during the same quarter last year.

Analysts polled by Thomson Reuters, on average, forecast a loss of 49 cents per share for the quarter.

Goldman Sachs earned more than $2.7 billion during the second quarter.

Morgan Stanley said underwriting revenues rose 19 percent to $855 million during the quarter. As credit markets have improved, more companies have tapped equity and debt markets to raise much-needed capital. Morgan Stanley was able to take advantage of that demand for underwriting new offerings.

“Their business model is very much predicated on equity and debt markets,” Jay said. Morgan Stanley should be able to take advantage of any sustained recovery in underwriting, he added.

But charges took a toll on the company’s profits. Without them, chief financial officer Colm Kelleher said, “core earnings swing quite significantly into the positive.”

Morgan Stanley recorded $700 million in charges tied to losses on investments in real estate. Banks with continued exposure to investments in real estate, such as Morgan Stanley, have been forced to take losses on those investments as the market continues to weaken.

Kelleher warned problems are likely to continue.

“We haven’t seen signs of bottoming,” Kelleher said of the commercial real estate market, though losses did decline from $1 billion the previous quarter.

Because of Morgan Stanley’s strong cash reserves, however, those losses will become more manageable and are no pose a major concern for investors worried about the stability of the bank, said Douglas Sipkin, an analyst with Pali Capital.

Morgan Stanley’s results were also hampered by an accounting rule related to the value of its debt. The rule requires companies, on paper, to record a charge to cover the additional cash it would need to meet its obligations when its debt is worth more.

Essentially, if Morgan Stanley had to buy its debt back at the end of the second quarter, it would have had to pay more for it than it would have a quarter earlier. So while the improving value of its debt means investors are more confident in its long-term prospects, it must take a charge because of that improving confidence.

That accounting rule reduced Morgan Stanley’s earnings by $1.32 per share in the second quarter. Revenue was reduced by $2.3 billion because of the rule.

Morgan Stanley also recorded an $850 million, or 74 cents per share, charge for repaying the money it received from the government under the Troubled Asset Relief Program. Last fall, amid the mushrooming credit crisis that led to the collapse of fellow investment bank Lehman Brothers Holdings Inc., the government provided hundreds of banks with loans to try and restart stagnant credit markets.

Last month, Morgan Stanley was one of 10 major banks that was approved to repay that loan. Goldman and JPMorgan Chase & Co. were also among the other major banks that repaid TARP funds. Morgan Stanley had received $10 billion as part of the government’s $700 billion program.

“TARP served an incredibly useful purpose in October and November” because it was able to stabilize the market, Kelleher told The Associated Press. But, he noted, with credit markets having been restored after being nearly shut down, the funds no longer were needed.

The TARP funds also came with restrictions such as limiting executive compensation. With those restrictions lifted, many major banks have begun to set aside more money for compensation.

Morgan Stanley set aside $3.88 billion for compensation during the second quarter, compared with $2.08 billion during the first quarter when it was still under TARP restrictions.

But, William Blair’s Lane said compensation figures were also a bit skewed during the quarter because of one-time costs associated with integrating the retail brokerage Smith Barney, which it recently acquired a majority stake in, and the changing business mix at the bank.

Shares of Morgan Stanley rose 19 cents to $27.75 in afternoon trading.

source: yahoo finance

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