Trading Bolsters Morgan Stanley -- WSJ
July 21 2016 - 03:02AM
Dow Jones News
By Liz Hoffman and Peter Rudegeair
Morgan Stanley delivered a strong showing in its fixed-income
trading business Wednesday but also tried to keep investor
expectations in check.
"Yes, it's a good number this quarter," said Chief Executive
James Gorman, as he announced the firm's stronger-than-expected
earnings. But he said shareholders had overreacted to poor
performance in the trading unit last year, and he didn't want them
to overreact in the opposite direction now.
"Let's see how it plays out over not each individual quarter,
but over the next couple of years," he said.
The stock rose 2.1% on Wednesday but remains down 10% for the
year.
Morgan Stanley made $1.3 billion trading bonds, currencies and
commodities last quarter, beating the $1 billion target Mr. Gorman
laid out last month. Analyst Glenn Schorr of Evercore ISI summed up
Wall Street's surprise: "Not a typo," he wrote.
But the bank has a complicated history with fixed income and in
recent months cut 25% of its staff in the business. Many investors
would prefer Morgan Stanley to focus on more stable businesses such
as wealth management, equities trading and investment banking. But
hitting profit targets and increasing revenue at any securities
firm without fixed income is difficult.
Morgan Stanley's overall profit fell 12% to $1.58 billion, or 75
cents a share. Revenue slipped 8.6% to $8.9 billion. Both measures
topped analyst expectations.
This quarter, Morgan Stanley did more with less. It recently
sold an oil merchant and reduced staff by 25% in the fixed-income
business. With a slimmer staff, Morgan Stanley didn't get the same
bump in trading revenue as its rivals did. Overall trading revenue
fell 2% in the second quarter, excluding an accounting adjustment,
while it rose by a double-digit percentage at J.P. Morgan Chase
& Co., Citigroup Inc. and Bank of America Corp.
Trading is the biggest single source of fees on Wall Street but
has been in decline since the crisis due to tougher capital rules
and diminished client appetite to take risks.
Activity rebounded this quarter as investors shook off
first-quarter jitters and Britain's vote to leave the European
Union generated a flurry of late-quarter trading.
While Morgan Stanley didn't benefit as much as its peers, it
showed early signs of progress from a recent shake-up. Over the
past year, Mr. Gorman has installed two executives from Morgan
Stanley's stock-trading desk to oversee the fixed-income business
and aggressively cut costs in the division.
Wednesday, he said those changes were starting to bear fruit.
Progress "was not going to evidence itself in the days and weeks
following the realignment, but we felt pretty confident in the
months and years following it, it would," he said. "And maybe we
are starting to see some of that."
Still, Morgan Stanley has seen glimmers of a turnaround in its
fixed-income business before and has ended up disappointing
investors. In early 2015, it narrowed the gap with rival Goldman
Sachs Group Inc. in fixed-income trading, but followed that with
two disappointing quarters.
Morgan Stanley's strength often comes from the other side of the
trading floor, buying and selling stocks. The equities desk where
stocks, derivatives and exchange-traded funds trade is perennially
Wall Street's busiest, churning out roughly $2 billion in revenue a
quarter. In a reversal, second-quarter revenue in that unit fell 5%
against a tough comparison to a strong 2015 showing.
The bank showed progress on two other long-term goals of Mr.
Gorman: cutting costs and boosting loans to clients of the firm's
large wealth-management unit.
Firmwide expenses fell 8%. The savings mostly came from lower
compensation, which fell alongside revenue, though executives said
they were making progress on other initiatives, such as cutting
nonessential travel by 50% through the six months of this year.
Meanwhile, loans to wealth-management clients hit a record $69
billion. Morgan Stanley has focused on offering tailored loans to
wealthy individuals, against stock they own as well as assets such
as real estate and art collections.
Still, progress on one of Mr. Gorman's key goals remained
elusive. The bank's return on equity was 8.3% in the second
quarter, better than the first quarter but below the 9% of last
year and the 9% to 11% range it hopes to hit by next year.
Write to Liz Hoffman at liz.hoffman@wsj.com and Peter Rudegeair
at Peter.Rudegeair@wsj.com
(END) Dow Jones Newswires
July 21, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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