MS Morgan Stanley

By Peter Rudegeair and Liz Hoffman 

Morgan Stanley 's profit fell 12% in the second quarter as the company weathered volatile markets and exceeded a trading target set by the company's CEO last month.

Earnings and revenue beat subdued expectations, pushing shares up 3.1% premarket.

The bank's net income declined to $1.58 billion, or 75 cents a share, from $1.81 billion, or 85 cents a share, a year ago. Analysts polled by Thomson Reuters had expected a per-share profit of 59 cents.

Revenue tumbled 8.6% to $8.91 billion, but topped the $8.3 billion forecast by analysts.

Morgan Stanley, the last of the major U.S. banks to report earnings, didn't get the trading bump most of its rivals reported. Trading revenue fell 7.1% to $3.26 billion from $3.5 billion a year ago. Excluding an accounting adjustment, trading revenue fell 2%.

Still, analysts expected an even sharper drop. In fixed income and commodities trading, where the firm has cut staff and set a $1 billion quarterly revenue target, Morgan Stanley reported second-quarter revenue of $1.3 billion.

"There was a general overreaction to the underperformance" of the fixed-income business last year and through the first quarter, Chairman and CEO James Gorman said on a conference call. "Yes, it's a good number this quarter. Are we shocked by it? Not really."

In stocks-trading, where Morgan Stanley has long been Wall Street's leader, revenue fell 5% excluding an accounting adjustment, though the bank gained market share from its chief rival in the space, Goldman Sachs Group Inc.

Investment-banking revenue fell 23% to $1.11 billion from $1.44 billion in the second quarter of 2015. Fees from advising on mergers and other deals rose 17% to $497 million from $423 million a year ago. Revenue on stock and bond underwriting slipped 40% to $611 million from $1.02 billion in the same period a year prior.

Mr. Gorman has been working to boost profitability by trimming the capital committed to bond trading desks and boosting loans to investing clients of the firm's large wealth management division. Earlier this year, the firm also disclosed its aim to cut $1 billion in expenses, a theme that has gained momentum at banks from Goldman Sachs to Bank of America Corp. this quarter.

Morgan Stanley showed progress on both of those goals in the second quarter. Firmwide expenses fell 8.4% to $6.43 billion from $7.02 billion in the second quarter last year. Cost from employee pay and benefits fell 8.9% to $4.02 billion from $4.41 billion.

Loans to wealth-management clients grew 19% to a record $69 billion. Along with a double-digit increase in corporate loans, the bank's loans book grew 6% to $198 billion, which helped boost net interest income 31% from last year to $913 million.

Return on equity declined to 8.3% from 9.1% in the second quarter of 2015. Morgan Stanley executives have pledged to lift returns to 9%-11%.

Morgan Stanley shares have tumbled 11% this year as investors fretted over the firm's ability to weather the slowdown. Other banks reported better-than-expected trading results in the second quarter, driven in part by a burst of client activity around the U.K. vote to leave the European Union in June.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

July 20, 2016 09:36 ET (13:36 GMT)

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