MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley said its third-quarter profit rose 12% to $1.78 billion as its giant wealth-management business continued to churn out reliable and growing profits even as trading revenue declined.

The Wall Street firm reported earnings of 93 cents a share versus analyst expectations of 81 cents a share. Revenue of $9.2 billion was up 3.2% from $8.91 billion a year earlier and beat analyst expectations of $9.02 billion.

Shares rose 1.1% premarket.

Rivals including J.P. Morgan Chase & Co. and Citigroup Inc. last week reported profit increases powered by commercial lending and credit cards. Morgan Stanley instead leans on its wealth management division, which oversees $2.2 trillion for some 3.5 million American households, to steady its earnings.

"All our businesses performed pretty well relative to the environment," Chief Financial Officer Jon Pruzan said. "Wealth continued to do very well -- that's a stability and growth story."

The smallest of Wall Street's big six banks, Morgan Stanley is in the late innings of a multiyear transformation under Chief Executive James Gorman, who has steered it away from lumpy, error-prone trading and toward steadier advisory and asset-management businesses.

The cornerstone of that pivot--the multiyear takeover of Citigroup's brokerage, Smith Barney--is now fully integrated, and Morgan Stanley has squeezed much of the obvious savings from the business, improving profit margins from single digits to 26.5% last quarter. That was a record, as was the division's $4.2 billion in revenue and $2.3 trillion in client assets.

Now, executives are looking ahead to boost revenue. A key initiative is pushing loans to wealth clients. Another is adding digital offerings -- Morgan Stanley will roll out a robo adviser for smaller account balances this fall -- without losing the loyalty of its 15,800 human brokers.

Morgan Stanley's return on equity, a key measure of how profitably it invests shareholders' money, stood at 9.6% in the quarter and 9.8% through the first nine months of the year. Mr. Gorman has targeted a minimum of 9% for the full year.

"Movin' the chains," Evercore ISI analyst Glenn Schorr wrote in a note to clients Tuesday morning.

Morgan Stanley reported an 8.7% increase in wealth management revenue, which now makes up nearly half of the firm's total. Net income in that division rose 24% year over year, and pretax margin was a record 26.5%.

Assets in accounts on which Morgan Stanley earns management fees -- rather than those that charge per-trade commissions -- cleared $1 trillion for the first time, a record 44% percentage of the firm's total assets. The firm has pivoted toward these fee-based accounts, which face fewer regulations, produce steadier revenue and pose fewer conflicts of interest than those based on commissions.

Trading revenue fell 8.2%, mirroring declines at rivals J.P. Morgan and Citigroup. Compared with those firms, Morgan Stanley is more heavily weighted toward hedge funds and active asset managers, which have had a rough go lately.

Revenue from stock-trading was essentially flat at $1.89 billion. As Wall Street's leader in that business -- among large global banks, Morgan Stanley earns about 20% of total equities fees -- its growth prospects are slim. But guarding its turf remains a priority for Edward Pick, the former equities chief who now oversees all firmwide trading businesses.

Morgan Stanley's smaller fixed-income division reported $1.2 billion in revenue, down 21% from year ago but still clearing a $1 billion quarterly target set out by Mr. Gorman.

Fixed-income trading dropped 27% at J.P. Morgan and 26% at Goldman Sachs, which also reported third-quarter earnings Tuesday.

"We saw the same issues that most others did," Mr. Pruzan said, adding that interest-rates and currencies trading was particularly slower.

Morgan Stanley's investment bankers, who arrange mergers and help companies raise money, reported $1.27 billion in revenue, up 15% from a year ago. Merger and underwriting fees all rose in the double digits on a percentage basis.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

October 17, 2017 08:13 ET (12:13 GMT)

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