By Justin Baer and Peter Rudegeair 

Morgan Stanley's quarterly profit tumbled by 53% after jitters about the global economy limited clients' appetite to trade or make deals.

Net income dropped to $1.13 billion, or 55 cents a share, from $2.39 billion a year earlier. Analysts polled by Thomson Reuters had expected a per-share profit of 46 cents.

Revenue tumbled to $7.79 billion, shy of the $7.87 billion forecast by analysts.

Morgan Stanley and other big banks are muddling through a steep slump in their debt-trading business. The downturn prompted the firm to cut jobs from the unit, which has weighed down Morgan Stanley's return on equity, a key measure of profitability.

Return on equity fell to 6.2% from 13.5% a year earlier, excluding an accounting adjustment. Morgan Stanley executives have pledged to increase that to between 9% and 11% by the end of 2017, a target that appears a bit more elusive given this year's slow start.

"I'll give Morgan Stanley credit for stepping up and putting out it out there," said Jeff Harte, an analyst with Sandler O'Neill + Partners LP. "But they run the risk of overpromising and under-delivering for things that are out of your control."

Morgan Stanley's executives based the target on ongoing cost cuts, regulators' blessing to return capital to shareholders through stock buybacks and dividend payments, and revenue gains of 4% a year. Revenue tumbled 21% in the first quarter.

"That's the perils of putting out a target is you get asked about it every time, every quarter, until you finally get there," James Gorman, Morgan Stanley's chairman and chief executive, said during a conference call with analysts. "But we did put it out for 2017."

Mr. Gorman said it was too early to second-guess the ROE goal, and that Morgan Stanley would "take additional appropriate actions" to shed expenses if business conditions don't improve.

"We also recognize we cannot control the environment in which we operate, but we are focused on what we can control, such as expenses," he said.

Investors' attention will now turn to the Federal Reserve's battery of bank stress tests, an annual process that determines how much excess capital financial firms can return to shareholders, analysts said.

Trading revenue fell 34% to $2.69 billion from $4.08 billion in the first quarter of 2015, a sharper drop than some peers.

Revenue from trading in debt, currencies and commodities fell 56% to $873 million, while the revenue from equity trading dropped 10% to $2.06 billion.

In an interview, Morgan Stanley Chief Financial Officer Jonathan Pruzan said January and February were turbulent months for its trading business, but that it saw improvement in March and so far in April. "The environment is clearly better, client activity is up a bi...[but] we're going to see bouts of volatility."

The drop in trading revenue, especially at the firm's fixed-income business, wasn't as sharp as many analysts and investors had feared heading into April. Bank stocks have rallied in the past week in part on relief that the most dire predictions about the first quarter proved unfounded.

The volatile markets also conspired to weaken investment-banking activity in the first quarter, hurting a division that had been a bright spot last year.

Investment-banking revenue fell 16% to $990 million from $1.17 billion in the year-ago quarter. Fees from advising on mergers and other deals rose 25% to $591 million, while revenue on stock and bond underwriting slipped 43% to $399 million.

Mr. Pruzan said that the bank's pipeline for mergers and acquisitions remains healthy as muted economic growth and the rise of activist investors continue to spur deals, even in a tough market backdrop. "A lot of the themes we saw that drove activity last year still exist," Mr. Pruzan said.

Revenue in Morgan Stanley's wealth-management arm was $3.67 billion, compared with $3.83 billion a year ago. In Morgan Stanley's investment-management division, revenue fell 29% to $477 million due to losses on its private-equity and real-estate funds.

The money-management arm also struggled with markdowns on private-equity investments in the quarter.

Morgan Stanley's expenses fell 14% to $6.05 billion from $7.05 a year earlier. Cost from employee pay and benefits fell 19% to $3.68 billion, or 47% of revenue.

The firm's shares have tumbled 19% this year as investors fretted over Morgan Stanley's ability to weather the slowdown.

Write to Justin Baer at justin.baer@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

 

(END) Dow Jones Newswires

April 18, 2016 12:35 ET (16:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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