Morgan Stanley CEO Warns on Outlook

Morgan Stanley (MWD) CEO Philip Purcell (search), under fire from investors, on Tuesday warned weak market conditions would hurt second-quarter results.

Purcell, in his first public presentation since March, said most investment banking and brokerage businesses in the industry saw double-digit declines in March and April compared with December and January.

"It affects our outlook for the second quarter," Purcell said at the annual UBS global financial services conference.

Global announced merger volumes fell 28 percent, global equity underwriting volumes fell 21 percent and high yield debt underwriting volume fell 38 percent from the comparable two-month period, Purcell said, citing industry data.

Stock prices and fund flows also slipped, Morgan Stanley (search) said, depressing brokerage and money management fees.

The disclosure comes after analysts in the past week lowered stock ratings and earnings estimates for securities firms, citing lower underwriting and trading results.

The New York-based investment bank's stock fell 2.6 percent on Tuesday, in line with other securities firms. Purcell's comments and rumors of large hedge fund losses together pulled investment banking shares lower.

"Purcell's negative comments about the business has taken a little off" investment bank stocks, Fox-Pitt Kelton analyst David Trone said.

Six weeks ago a group of eight retired executives, angry over five years of laggard stock performance, launched a campaign to drive him out of office. They joined critics who complain Morgan Stanley's brokerage and credit-card activities have dragged on results relative to other Wall Street firms.

The campaign increased tensions within the company's businesses and helped encourage two dozen departures, including the firm's top securities executives and investment bankers.

Purcell conceded Morgan Stanley lost valued people since he shook up management ranks and reorganized the company's securities businesses. But Purcell said he tried to "minimize breakage" and maintained the firm was now getting back to work, moving ahead with efforts to boost results.

"The media frenzy of recent events has been disruptive to all three of our key constituencies," Purcell said, referring to investors, clients and staff. "The sooner we can move on to our key businesses, the better."

Investors expecting details on how Purcell would revive Morgan Stanley's profit and stock were left a little flat.

"They didn't really fess up to the fact that they have some real problems that have to be addressed. They tried to gloss over them," said Matrix Asset Advisors money manager David Katz, who previously had warned the board it must stem attrition at Morgan Stanley.

The March 28 promotions of Zoe Cruz and Stephen Crawford as co-presidents triggered the departure of several top securities executives, bankers and traders from the company's securities division. Purcell acknowledged there will be more departures.

The executives played down the recent turnover as typical. Morgan Stanley usually loses about 100 managing directors, or 10 percent, each year Purcell said. This year, he mused, "you'll read about every one of them in the newspaper."

Looking ahead, Purcell said he expects ongoing improvement in the performance of several businesses, including retail brokerage and asset management. Yet he cautioned a return to a premium stock price and profitability will take some time.

"I cannot promise overnight results," Purcell said.

Purcell could face a tough proxy battle next spring if Morgan Stanley shares continue to lag, some investors and analysts say. Corporate governance changes, enacted under pressure from investors, make it easier to remove directors and possibly oust Purcell.

Yet Morgan Stanley is poised to deliver above-average earnings and revenue growth in the second half, said analyst Dick Bove of Punk, Ziegel & Co. Last year Morgan Stanley suffered from disappointing fixed income trading results as well as steep regulatory and legal costs.

Morgan Stanley also is poised to reap the benefits of investments in the business over the past few years, Bove said. "They have made significant changes that will be very positive for results this year," Bove said.

Purcell noted the proposed spinoff of its Discover card unit would improve Morgan Stanley's returns, as the company transfers a big chunk of capital to the stand-alone company.

"Discover has been a steady contributor and a high returning business. We will feel the impact of the spin-off on revenue, earnings and capital," Purcell said.

Yet Discover also produced capital Purcell used to invest in the securities businesses.