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Morgan Stanley Settlement Wipes Out Half of 2014 Profit - Analyst Blog

Zacks Equity Research
Updated

Morgan Stanley (MS) revealed in a regulatory filing yesterday that it has agreed to a $2.6 billion settlement with the U.S. Department of Justice (DOJ), Civil Division and the U.S. Attorney’s Office for the Northern District of California to resolve claims concerning the sale of mortgage-backed securities (MBS) prior to the financial crisis of 2008.

Impact on 2014 Earnings

Though the current settlement is the right step taken by Morgan Stanley to move past the legal issues pertaining to its business conduct, the bank did not keep any reserves earlier for such payments. As a result, the bank restated its 2014 results with earnings being hugely hit.

The legal reserves were augmented by around $2.8 billion for the settlement and other related issues and integrated with the expense line of the Institutional Securities segment. Overall costs increased and profits plunged.

Morgan Stanley’s income from continuing operations for 2014 declined by $2.7 billion or $1.35 per share. On Jan 20, the bank had reported income from continuing operations of $5.7 billion or $2.75 per share for the year.

Similar Settlements

The negotiations to end probes into the shoddy mortgage practices of the banking giants have been going on for quite some time. Banks including JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) along with Morgan Stanley have been consistently under the DOJ radar for allegedly providing mortgages to ineligible customers and selling MBS to investors without disclosing the associated risks.

In 2013, JPMorgan reached a $13 billion settlement with several law enforcement agencies to end all the ongoing and probable civil claims related to the sale of MBS. Citigroup paid $7 billion last year severely hurting its second-quarter results, while BofA disbursed around $17 billion. The compensations by these banks were used for consumer relief in the form of principle write-downs and modified terms of loans.

Our Take

While the other Wall Street majors have already shelled out billions of dollars in settlements, Morgan Stanley finally followed suit and is in the process of settling the probe to avoid lengthy court proceedings. With the bank confronting its legal issues head on, we believe that the resolution of such cases will help it to focus on its core enterprises.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).


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