MS Morgan Stanley

By Liz Hoffman and John Carney 

Morgan Stanley said its quarterly earnings rose 57%, beating expectations, as the big Wall Street firm benefited from a trading rebound that has helped the country's largest banks.

The New York-based firm reported a profit of $1.6 billion, or 81 cents a share. That compares with the $1.02 billion, or 48 cents a share, it reported in the same period last year. Excluding accounting adjustments, earnings in the year-earlier period were 34 cents a share.

Revenue grew 15% to $8.91 billion from $7.77 billion a year earlier, when sluggish trading activity and losses in its Asia private-equity portfolio caused Morgan Stanley to post one of its worst quarters under Chief Executive and Chairman James Gorman.

Analysts polled by Thomson Reuters had expected Morgan Stanley to earn 63 cents a share on revenue of $8.17 billion.

Shares edged up 1.3% premarket. The stock has outperformed its biggest peers since midsummer, up 24% since July 1, and are roughly flat on the year.

The firm's return on equity, a closely watched measure of profitability, was 8.7% in the third quarter, versus 5.6% a year ago. That is edging closer to Mr. Gorman's goal of 10% in 2017, but the firm has shown unsteady progress toward meeting it.

Last among big banks to report third-quarter earnings, Morgan Stanley faced generally high expectations. Rivals reported strong results in their trading and investment banking businesses, strengths at Morgan Stanley.

Both those gains were led by fixed income, where Morgan Stanley is weakest. Stock trading, Morgan Stanley's strength, was down sharply at Bank of America Corp. and Citigroup Inc.

Morgan Stanley bucked that trend and turned in the best year-over-year performance in fixed-income trading. Revenue from trading bonds, currencies and commodities surged 61% to $1.48 billion. Equities revenue edged up 0.7% from last year to $1.88 billion.

Morgan Stanley makes more money in stock trading than any of its rivals, but has struggled to build a consistently profitable business trading corporate and government debt securities, currencies or commodities. It recently laid off 25% of its fixed-income traders and set a soft target of $1 billion a quarter in fixed-income revenue, a level it has now exceeded two quarters in a row.

Mr. Gorman, who shook up management in the firm's trading business last year, is working toward what he has called a "credible and critical" bond-trading unit -- just big enough to support clients and Morgan Stanley's large debt-underwriting business without overextending the firm's balance sheet.

Its second quarter of $1 billion-plus revenue in fixed-income -- albeit in a strong quarter for that business everywhere -- is a win for Edward Pick, the former equities trader whom Mr. Gorman tapped last fall to turn around the struggling unit.

Morgan Stanley finance chief Jonathan Pruzan cited mortgage bonds, interest rate products and commodities as sources of trading strength in the quarter. Those trends have continued, according to Mr. Pruzan. "The first few weeks of the fourth quarter feel a lot like the last couple weeks of September," he said.

Investment banking revenue, which includes merger advisory and underwriting fees, fell 6.5% to $1.1 billion from a year earlier.

Within that division, fees from stock and stock-linked offerings fell 11% amid a dearth of initial public offerings, which has been felt hard at Morgan Stanley, a top-two underwriter in Silicon Valley.

Fees from debt sales rose 5.5% to $364 million. Fees for merger advice, where Morgan Stanley typically ranks No. 2 in the U.S., rose 1.4% to $504 million. That figure at its closest peer, Goldman Sachs Group Inc., fell 19%.

In wealth-management, revenue rose 6.6% to $3.88 billion, a quarterly record. The unit's profit margin was 23%, above Mr. Gorman's publicly stated target of 22%.

Boosting the brokerage business is part of Mr. Gorman's plan, now a few years under way, to move Morgan Stanley away from volatile trading and into more stable areas like wealth management. The firm has recently taken steps to bolster the division, like offering higher-yielding savings accounts to lure deposits and encouraging its brokers to offer mortgages to boost revenue.

That plan generally has broad support among investors. In the past five years, Morgan Stanley shares have outperformed Goldman Sachs by about 40 percentage points, narrowing the market value gap between the two to less than $10 billion.

One shareholder in particular likes the plan: activist hedge fund ValueAct Capital LP, which took a 2% stake in Morgan Stanley this summer and has privately urged management to push further into wealth management, people familiar with the matter have said.

Investment management revenue more than doubled to $552 million. That division, whose chief, Dan Simkowitz, is about a year into the job, is Morgan Stanley's smallest and has grappled with a shift toward passive investing and new regulations affecting money-market funds.

Firmwide expenses, excluding interest, rose to $6.53 billion from $6.43 billion last quarter. Morgan Stanley is under pressure to trim costs, and Mr. Gorman has promised $1 billion in cuts by mid-2017. He has made progress so far by revamping the firm's procurement system, moving some jobs to lower-cost cities like Bangalore and Baltimore, and combining data centers.

Compensation, the largest single cost item, stood at $11.8 billion, or 46% of revenue, through the first nine months of the year, down from $12.37 billion, or 49% of revenue, this time last year.

Write to Liz Hoffman at liz.hoffman@wsj.com and John Carney at john.carney@wsj.com

(END) Dow Jones Newswires

October 19, 2016 08:10 ET (12:10 GMT)

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