MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley posted its best fourth-quarter results since the financial crisis, keeping a lid on expenses and growing revenue in both its core Wall Street businesses and its newer wealth franchise.

The New York-based firm reported a profit of $1.67 billion, or 81 cents a share, in a quarter that included a surge of postelection trading activity. That compares with $908 million, or 39 cents a share, a year earlier.

Revenue grew 17% to $9.02 billion. Analysts polled by Thomson Reuters had expected revenue of $8.47 billion and earnings of 65 cents a share.

"This is what you came for," Evercore ISI analyst Glenn Schorr wrote of investors who have pushed Morgan Stanley's shares up about 22% since Election Day. The gains notched by all financial stocks reflected investors' hopes that a Trump administration would result in lighter regulation, stronger economic growth and higher interest rates.

For all of 2016, Morgan Stanley's revenue fell 1.5% versus the prior year and net income dropped 2.4% as a strong second half failed to fully compensate for a sharp drop in markets at the start of 2016.

"It's fair to say the year finished a lot better than it began," Chief Executive James Gorman said on the firm's earnings call Tuesday. "There is certainly more reason to be optimistic."

Morgan Stanley has lately avoided expensive legal mistakes and improved in trouble spots like debt trading.

But its return on equity, a key measure of profitability, remains short of its 10% target. Many big banks have struggled to beat that yardstick since the financial crisis, but Mr. Gorman, CEO since 2010, has made clearing it a central goal for the bank -- one his job may hinge on.

Mr. Gorman has in the past blamed the bank's stubbornly low returns on the amount of capital regulators require it to hold. Last spring, Morgan Stanley received Federal Reserve approval to increase its shareholder payouts for 2017 though it was required to resubmit its plan to address shortcomings. It did so last month.

Morgan Stanley stock was down more than 2% in early trading Tuesday as the financial sector fell.

Morgan Stanley faced high expectations following fairly strong earnings from rivals J.P. Morgan Chase & Co. and Bank of America Corp. last week that AllianceBernstein analyst John McDonald called "good enough to keep the dream alive."

While nearly all of Morgan Stanley's businesses posted stronger quarters, the big contributor was debt trading, traditionally a weak spot. The unit nearly tripled revenue to $1.47 billion. That marked the third straight quarter the firm cleared a $1 billion target for this business laid out by Mr. Gorman.

Morgan Stanley did so with 25% fewer traders after layoffs last year, and while taking less risk.

The gains follow a shake-up last year, in which Mr. Gorman combined stock and debt trading and put a top equities deputy in charge of both. Since then, reporting lines have been clarified and the two desks are better sharing resources and technologies, Mr. Gorman said Tuesday.

Investment-banking revenue rose 4.9% as higher merger and debt-underwriting fees offset a decline in initial public offerings. Morgan Stanley ranked as the No. 2 M&A adviser last year, behind Goldman Sachs Group Inc., which reports fourth-quarter results Wednesday.

Despite the attention paid to its core securities businesses, Morgan Stanley is starting to look more like the bank it is, pushing further into activities like deposit-taking and lending. Assets in its U.S. banking unit hit a record $180 billion, and the firm has continued to increase its lending book.

Mortgages are up 17% year-over-year and loans backed by stock portfolios or other assets like art or businesses are up 26%.

Part of that push comes from wealth management where an army of brokers are now peddling loans alongside investment and retirement advice. The wealth management division posted higher revenue and a record $3.4 billion in pretax earnings for the year.

Advising Americans on their retirement and managing their investments now accounts for about 40% of Morgan Stanley's profits -- once unthinkable for a firm that clung to its investment-banking roots. For the first time ever, each of its 15,800 brokers is billing $1 million on an annualized basis.

Fees from these businesses don't swing as much and are viewed more favorably by regulators. But they are less profitable because wealth advisers keep a larger haul of the revenue they bring in than bankers or traders.

Over all, Morgan Stanley paid out 46% of its 2016 revenue in compensation compared with 47% last year.

Expenses for the firm fell 3.3% as Mr. Gorman seeks to make good on his promise to trim $1 billion in costs this year. But he warned on the earnings call against being "penny-wise and pound-foolish" by cutting compensation too deeply and losing top employees.

Among major businesses, the lone blemish was the investment-management division, Morgan Stanley's smallest. Revenue fell 19% and profits dropped 60% after the bank wrote down or sold legacy private-equity investments and recognized a $60 million loss. Its pretax profit margin fell to single digits.

The division manages money for other asset managers, pension funds and corporations. It has grappled with a shift toward passive investing and new regulations affecting money-market funds.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

January 18, 2017 02:48 ET (07:48 GMT)

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