MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley posted its best fourth quarter since the financial crisis, handily beating analyst expectations as all of its major businesses generated higher revenue.

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 the $908 million, or 39 cents a share, it reported in the same period a year earlier.

It is the bank's highest profit in any fourth quarter since 2006. Morgan Stanley has tended to struggle toward year-end and has lost money two of the past five fourth quarters, in part due to legal set-asides that are now largely behind it.

Those legal issues are now mostly behind the bank, which has also improved in trouble spots like debt trading. That said, profitability is still below a key target set by Chief Executive James Gorman.

Revenue in the fourth quarter grew 17% to $9.02 billion from $7.74 billion a year earlier. Analysts polled by Thomson Reuters had expected revenue of $8.47 billion and earnings of 65 cents a share.

The firm's return on equity, a closely watched measure of profitability, was 8% for the year. That was up from 7.8% in 2015, including accounting adjustments, but still short of the 10% target laid out by Mr. Gorman.

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.

Morgan Stanley shares rose 1.4% premarket. They have gained 28% since the election, which sent financial stocks soaring on investor hopes of lighter regulation.

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."

A flurry of postelection stock trading boded well for Morgan Stanley, Wall Street's leading equities-trading house.

Revenue in that division, which trades stocks and stock-linked instruments, rose 7.4% to $1.95 billion from $1.82 billion a year ago, while debt-trading revenue -- a weaker spot for Morgan Stanley -- nearly tripled to $1.47 billion from $550 million a year earlier. Total sales and trading revenue grew to $3.19 billion from $2.37 billion in the year-earlier period, including accounting adjustments.

Investment-banking revenue, which includes merger advisory and underwriting fees, rose 4.9% to $1.27 billion from $1.21 billion in the fourth quarter of 2015.

Fees from corporate mergers fell 17%. Along with rivals, Morgan Stanley, the No. 2 M&A adviser last year, faces a tough comparison with 2015 when merger activity set a record as chief executives scrambled for growth.

In wealth management, where Mr. Gorman has steered Morgan Stanley in search of stabler profits and less regulatory scrutiny, revenue rose 6.4% to $3.99 billion from $3.75 billion a year earlier. The unit's profit margin was 22%, down from 23% last quarter and within the range Mr. Gorman has targeted.

Advising Americans on their retirement and managing their investments now accounts for about half of Morgan Stanley's revenue -- once unthinkable for a firm that clung to its investment-banking roots. Fees from these businesses don't swing as much with the market and receive less scrutiny from regulators.

But they are less profitable than, say, investment banking, where margins can approach 50%. Wealth advisers keep a larger haul of the revenue they bring in than bankers or traders.

Morgan Stanley's compensation ratio was 46% for the year, compared with 47% last year. Overall annual expenses fell 3.3% as Mr. Gorman seeks to make good on his promise to trim $1 billion in costs, assuming flat revenue.

Investment-management revenue fell 19% to $500 million and its pretax profit margin fell to single digits. That division, Morgan Stanley's smallest, 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 17, 2017 08:10 ET (13:10 GMT)

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