Morgan Stanley (NYSE:MS) released results for the third quarter of the year. If you set aside the $2.3 billion in pre-tax accounting loss the global investment bank incurred from revaluation of its own debt, it is clear that the results for the quarter are quite commendable.  While the bottom-line for this quarter shows a billion dollars in loss, Morgan Stanley’s quarterly income after adjustments for the accounting charges actually grew to $535 million from $312 million in Q2 2012 and $35 million in Q3 2011. And the improvement can be attributed entirely to its institutional securities business.
We continue to stand by our $19 price estimate for Morgan Stanley’s stock, which is around the current market price.
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Morgan Stanley’s institutional securities business reported net revenues of $1.4 billion this quarter against $3.2 billion in Q2 2012 and $6.4 billion in Q3 2011. Undo the impact of the accounting debt valuation charge/gain in each of these quarters and the picture changes completely with revenues of $3.6 billion for Q3 2012, $2.9 billion for Q2 2012 and $3 billion for Q3 2011. No wonder the DVA accounting charge requirement has been met with much criticism in the recent past.
Without letting these charges affect our analysis, we see that debt trading roped in $1.5 billion this quarter – a significant improvement from $770 million last quarter and $1 billion for the same quarter last year. The result was largely expected given the fact that global markets improved this quarter with both debt and equity markets rallying over growing optimism on recovery plans for the Eurozone, the prospect of a sustained US economic recovery, and additional measures taken by the Fed.
High demand for debt securities also rubbed off on the bank’s debt underwriting business, which saw revenues jump to $431 million this quarter from $338 million last quarter and $212 million in Q3 2011.Notes: