By Peter Rudegeair 

Morgan Stanley lost $911 million when Archegos Capital Management imploded last month, tarnishing a record-setting quarter for the Wall Street firm.

The New York-based bank on Friday reported quarterly profit of $4.1 billion, or $2.19 a share, on revenue of $15.7 billion. That beat the consensus estimates of analysts polled by FactSet of per-share earnings of $1.72 on revenue of $14.1 billion.

Morgan Stanley reaped big gains from the euphoric market conditions of early 2021. But record performance across many of the bank's businesses was offset by credit and trading losses it booked following a fire sale of more than $30 billion worth of stocks tied to Archegos, the family office run by former Tiger Asia manager Bill Hwang.

More than two-thirds of the banks' losses on Archegos were related to collateral Morgan Stanley sold at lower prices to repay margin loans the fund borrowed to increase its holdings in a small number of stocks. The remainder of the Archegos losses came when the bank closed out smaller Archegos positions that it hadn't seized to meet the margin call, Chief Executive James Gorman said on a conference call with analysts.

While those positions weren't especially problematic for the bank, Mr. Gorman said, it chose not to take the risk that they could later sour and lead to bigger losses. "I regard that decision as necessary and money well spent," he said. "We didn't want this thing to be lingering."

Morgan Stanley's obligations to an investment-banking client prevented it from acting sooner to avoid losses, Mr. Gorman added. During the last week of March, the bank had a lead role arranging a sale of stock for ViacomCBS Inc., a company in which Archegos held a large stake. Morgan Stanley waited until that offering closed before it liquidated Archegos's holdings of ViacomCBS, ceding first-mover advantage to Archegos's other lenders.

Mr. Gorman said Morgan Stanley will take a hard look at its relationships with family offices such as Archegos that have concentrated positions across multiple banks. "We're never happy taking a loss, but our job is to deal with the facts as reality and get on top of it," he said.

Still, Morgan Stanley rounded out an all-time great first quarter from the nation's big banks. Asset prices rallied, millions of investors traded stocks with abandon and scores of technology and special-purpose acquisition companies listed their shares publicly, creating an optimal environment for banks' Wall Street divisions. On Wednesday, Morgan Stanley rival Goldman Sachs Group Inc. reported record quarterly revenue and net income.

The same waves that lifted Goldman also lifted Morgan Stanley. Stock- and bond-trading revenue rose 29% to $5.8 billion. Fees from advising on deals and underwriting stock and bond offerings more than doubled to $2.6 billion.

Morgan Stanley's E*Trade business also benefited from the burst of trading activity among individual investors. The number of retail-trading clients at Morgan Stanley increased 7% from the end of 2020 to 7.2 million, and the average daily number of retail trades the company handled for the quarter exceeded 1.6 million.

Revenue at Morgan Stanley's wealth-management division, which includes E*Trade, increased 47% to roughly $6 billion. Its profit margin reached 27% before taxes, up slightly from the first quarter of 2020.

The firm's return on tangible equity, a measure of how profitably it puts shareholders' money to use, was 21% for the quarter.

Operating expenses increased 45% to $10.5 billion thanks in part to a 59% increase in compensation and benefits. Morgan Stanley's first-quarter compensation expense of $6.8 billion was 43% of revenue, a similar ratio from a year earlier.

Unlike other banks that have reported weak demand for loans among their consumer and commercial clients, Morgan Stanley boosted lending by 15% to $303.4 billion outstanding.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com

 

(END) Dow Jones Newswires

April 16, 2021 11:19 ET (15:19 GMT)

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