By Peter Rudegeair
Morgan Stanley's second-quarter profit beat analysts'
expectations as the Wall Street firm increased trading revenue to
the point where it almost bested rival Goldman Sachs Group Inc. in
the business.
The New York-based bank reported a profit of $1.81 billion, or
$0.85 per share. That fell short of the $1.9 billion it reported in
the same period of 2014. But the earnings result beat analysts'
projections of $0.74 a share.
The firm's revenue rose to 13% to $9.74 billion. Excluding
accounting adjustments, revenue of $9.56 billion beat the $9.10
billion expected by analysts polled by Thomson Reuters.
Trading revenue drove the quarter's performance, notable for a
firm that has de-emphasized trading and put many of its chips on
wealth management. Morgan Stanley's trading revenue totaled $3.5
billion in the quarter, up 32% from a year ago. At Goldman, a firm
more associated with trading prowess, second-quarter trading
revenue fell 6% to $3.6 billion, leading to a narrow trading gap of
about $97 million between the two.
"They won the trading game this quarter," said Jeff Harte, an
analyst with Sandler O'Neill. "The market will be pleasantly
surprised."
Morgan Stanley is coming off a strong first quarter in which
Chief Executive James Gorman's strategy of de-emphasizing fickle
businesses like bond trading and bulking up more consistent ones
like wealth management bore fruit. Wealth management also performed
strongly in the second quarter, though its revenue growth rate was
a more subdued 5%.
Within trading, revenue from bonds, foreign exchange and
commodities climbed 30% to $1.38 billion and revenue from equities
jumped 28% to $2.34 billion. Fixed-income revenue fell 31% from the
first quarter, seasonally a strong part of the year for trading,
while equities trading gained 2% sequentially.
Chief Financial Officer Jonathan Pruzan said in an interview
that trading government bonds and other interest rate-sensitive
securities accounted for much of the increase in fixed income.
This quarter's earnings are the first since former Morgan
Stanley Chief Financial Officer Ruth Porat left to take the same
position at Google Inc. She was replaced by Mr. Pruzan, a veteran
Morgan Stanley investment banker.
Revenue from Mr. Pruzan's old home in investment banking were
relatively flat at $1.44 billion. Across the three components of
that business--advising on deals, underwriting stocks and
underwriting bonds--growth was 1% or less. Mr. Pruzan said in an
interview that Morgan Stanley had a "high level of engagement with
clients" during the quarter, but that sometimes results can be
lumpy, depending on when deals close.
Profit in Morgan Stanley's wealth-management arm before taxes
was $885 million, up 16% from the $763 million it reported a year
ago. The division's profit margin before taxes was 23%, within the
22-25% range executives are targeting for the year.
Morgan Stanley's firmwide expenses rose 5% to $7.02 billion from
$6.68 billion in the second quarter last year. Compensation and
benefits expenses were $4.41 billion, up 5% from $4.2 billion a
year ago.
Return on equity, a commonly used measure of bank profitability
that Mr. Gorman has flagged as a key metric, was 9.1% compared with
10.7% in the second quarter a year ago excluding an accounting
adjustment. Morgan Stanley executives have pledged to lift return
on equity above 10%.
After a strong 2014, shares in Morgan Stanley have risen around
3.5% since the start of 2015 compared with a 6.7% increase in the
KBW index of bank stocks over the same period.
Justin Baer contributed to this article.
Write to Peter Rudegeair at peter.rudegeair@wsj.com
Corrections & Amplifications
A previous version of this story misstated the year-ago profit
for Morgan Stanley. The story has been corrected.
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