UPDATE 2-Morgan Stanley Smith Barney results flat-Citigroup

* Citi says unit’s Q3 performance “comparable” with Q2

* CFO: brokerage Q3 results reflect “industry weakness”

* Analyst: comment not good news for Morgan Stanley

* CFO: Citi looking at potential sales of minority stakes
(Adds analyst and CFO comments, background)

By Joseph A. Giannone

NEW YORK, Oct 18 (BestGrowthStock) – Citigroup Inc (C.N: ), 49
percent owner in brokerage Morgan Stanley Smith Barney, told
investors on Monday that the joint venture’s third-quarter
results were “comparable” with those of the second quarter,
reflecting “weakness across the industry.”

That comment, Chief Financial Officer John Gerspach’s only
remark on the venture, does not bode well for Morgan Stanley.

“In other words: not good,” said Sanford C. Bernstein
banking and brokerage analyst Brad Hintz. “Retail investors
continue to shun the equity market.”

Individual investors are pouring their money into bond
funds, seeking some yield, and steering clear of stocks because
of doubts about the economy, Hintz said. Trading volumes remain
muted, forcing brokers to pursue new sources of revenue, namely
the sales of loans and banking accounts.

“And banking products pay enough to keep the lights on and
the heat on in the building,” Hintz joked.

Citi said the joint venture’s balance sheet assets fell by
$1 billion during the past year to $26 billion on Sept. 30.
Beyond that, Citi disclosed very little information about the
largest U.S. brokerage.

Joint venture partner and controlling owner Morgan Stanley
(MS.N: ) reports its results on Wednesday, where wealth
management has a much bigger impact on the bottom line.

A DISAPPOINTING QUARTER

Morgan Stanley’s second quarter was marred by $5.5 billion
of net client withdrawals. Withdrawals were particularly large
in the United States, where $7.9 billion headed for the exits.

Morgan Stanley’s wealth division, which gets small
contributions from other businesses, posted a second-quarter
profit of $110 million, an 11 percent increase from the first
quarter. Net revenue was little changed at $3.1 billion, but
pretax profit margin narrowed to 7 percent, well below the
company’s goal of 20 percent.

Citi in June last year swapped Smith Barney and other
brokerage businesses for a 49 percent stake in the joint
venture plus $2.75 billion of cash.

Morgan Stanley Smith Barney is one of many assets that
Citigroup intends to sell off to create a stronger company.

By the terms of the joint venture, Morgan Stanley will
increase its ownership after three years, or June 2012, though
Citi will retain a “significant stake” through at least 2014.

There is occasional speculation in the market that Morgan
Stanley wants to accelerate its purchases to gain a larger
share of the profit generated by the venture.

CFO Gerspach on Monday told analysts that Citigroup is
looking at its assets, including the brokerage venture, and
noted the continued sale of assets will improve Citigroup’s
capital ratios. He did not discuss the timing of these sales.

“We clearly are looking at the minority interests that we
have. The single largest component of those … is our
investment in the Morgan Stanley Smith Barney joint venture,”
he said. “That has a natural exit built into the contractual
arrangement that we have.”
(Editing by Gerald E. McCormick and Robert MacMillan)

UPDATE 2-Morgan Stanley Smith Barney results flat-Citigroup