By Saabira Chaudhuri
Morgan Stanley said second-quarter profit nearly doubled as
continued strong results from the wealth-management and
investment-banking businesses helped offset a slump in trading
revenue.
The results were the latest in a bank earnings season in which a
June pickup in trading helped several banks exceed analyst earnings
expectations for the quarter.
Morgan Stanley, the last of the six large U.S. banks to report
earnings, saw shares rise 1.3% in recent trading as results beat
analyst estimates.
Morgan Stanley's strong results show that the firm's turnaround
under Chief Executive James Gorman is continuing to gain steam as
the wealth management business enjoys rising markets and fatter
margins.
Shares of Morgan Stanley have risen about 23% in the past year,
which is better than the performance logged by the other five large
U.S. banks. In the second quarter, the firm's equities-trading
business held up better than that of rivals, with revenue besting
that of Goldman Sachs Group Inc. Chief Financial Officer Ruth Porat
in an interview said the equities arm was helped by strong results
in prime brokerage, mitigated by a drop in derivatives trading.
For the quarter, Morgan Stanley reported a profit of $1.94
billion, up 97% from the year-earlier profit of $980 million. On a
per-share basis, Morgan Stanley's profit was 94 cents, or 60 cents
when stripping out accounting adjustments and adjusting for a $609
million tax benefit. Analysts polled by Thomson Reuters had
expected adjusted earnings of 55 cents a share.
On the tax benefit, Ms. Porat said Morgan Stanley is nearing the
completion of a yearslong tax review that has allowed it to release
some reserves it previously set aside for tax issues.
Revenue edged up 1.1% to $8.61 billion. Revenue excluding
accounting adjustments rose 2.2% to $8.52 billion, coming in above
analyst estimates for $8.19 billion.
Though Morgan Stanley has a smaller fixed-income, currencies and
commodities arm than some of its peers, the unusually slow markets
still dented the firm's results. Excluding certain accounting
adjustments, FICC revenue fell 12% to $1.01 billion from a year
earlier.
Ms. Porat said the drop was driven entirely by lower
foreign-exchange-trading revenue, and added that credit products
did well in the quarter. Like other firms, Morgan Stanley saw
trading activity pick up a bit in June, but Ms. Porat said it is
"too early to call" whether this would continue.
The New York investment bank, whose trading arm is more heavily
weighted toward equities than that of its rivals, basically
maintained flat revenue in that unit, despite a broad slump in
trading volume during the quarter. The firm's equities-trading
business continued to gain momentum against the firm's most direct
rival, Goldman Sachs. Morgan's revenue in the business came in at
$1.79 billion, down from $1.80 billion in the year-earlier quarter.
Goldman meanwhile reported equities trading revenue of $1.63
billion.
Morgan Stanley continued to benefit from a deal-making
environment that is improving as corporate executives grow more
confident about the economy. The firm's investment banking division
generated advisory revenue of $418 million, up from $333 million a
year-ago and from the $336 million reported in the first quarter.
Meanwhile, debt underwriting revenue rose 26% to $525 million from
$418 million and equity-underwriting revenue jumped 50% to $489
million from $327 million a year earlier.
The growth comes as Morgan Stanley and other large banks battle
boutiques that are taking more market share. Former Morgan Stanley
investment-banking chief Paul Taubman, for example, has won some
business on his own after leaving and recently started hiring
ex-colleagues as he gears up to start a new firm.
Morgan Stanley's institutional-securities business, which
includes investment banking and sales and trading results, reported
adjusted revenue down at $4.16 billion, from $4.18 billion a year
earlier and $4.50 billion in the prior quarter.
The firm's FICC trading woes were offset by its
wealth-management business, which again delivered strong results.
Revenue in that division rose 5.2% from a year earlier to $3.72
billion, in line with analyst expectations.
The wealth-management unit's pretax profit margins, a closely
watched efficiency metric, jumped to 21% in the second quarter,
compared with the 18.5% reported a year ago and 19% in the first
quarter. Analysts had widely expected the margin to improve
sequentially as compensation accruals drop from the seasonally
higher levels shown in the first quarter. Morgan Stanley is now
close to the target pretax profit margin of 22%-25% it set earlier
for the end of next year.
"Overall it was a solid quarter, with global wealth management
and institutional securities outperforming relative to
expectations, offsetting slightly weaker than expected results in
asset management," said Evercore analyst Chris Allen.
Asset management revenue rose 9% from a year earlier to $2.63
billion.
During the quarter, Morgan Stanley showed some progress in
reining in expenses. Overall, noninterest expense was $6.62
billion, down 1.4% from the year earlier but flat from the first
quarter.
"We think the Morgan Stanley" story is playing out how owners
would like, " said ISI analyst Glenn Schorr, noting that wealth and
asset management were 50% of Morgan Stanley's revenue this
quarter.
Morgan Stanley has worked to slim down its fixed-income business
and focus more on wealth management and equities trading,
businesses that gives it more stable revenue. That strategy has
paid off in recent quarter as the firm has largely shrugged off the
impact of a broad slump in bond trading revenue that has pummeled
profits for many of Morgan Stanley's peers.
"We've often said what has been most profound about Morgan
Stanley in the past few years has been our repositioning," said Ms.
Porat, noting that fixed-income trading is a much smaller business
for Morgan Stanley now than before.
Justin Baer contributed to this article
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires