By Liz Hoffman 

Last October, Morgan Stanley Chief Executive James Gorman gave the head of the firm's stock-trading unit a new assignment: Clean up the mess on the bond-trading desk.

One year in to Edward Pick's new role, there are signs of improvement. Morgan Stanley, the weakling among Wall Street's fixed-income giants, reported big gains in that business Wednesday en route to quarterly results that easily topped expectations.

Fixed-income divisions -- which include bonds, currencies and commodities -- have been the star of U.S. bank earnings this quarter. Morgan Stanley's gains follow those reported over the past week by rivals including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co.

The fixed-income unit at Morgan Stanley also brought in more than $1 billion in revenue for the second consecutive quarter, though the business has suffered enough slumps over the years to prevent executives from celebrating yet.

"We're not and did not in the second quarter run any victory lap around fixed income," Mr. Gorman said Wednesday.

Across Wall Street, new capital rules have hobbled trading profits, possibly for good, and forced banks to cut staff and make tough decisions about when and how to trade with clients.

Now, some analysts say the yearslong decline in fixed-income trading may be easing.

"The past two quarters have changed the sentiment," said Devin Ryan of JMP Securities. "The difficult quarters last year and early this year are starting to look like the worst-case scenario, not the new normal."

Overall, Morgan Stanley reported a profit of $1.6 billion, or 81 cents a share, up from $740 million, or 34 cents a share, in the same period last year, excluding an accounting adjustment.

Profits beat analysts' expectations, as did revenue of $8.91 billion, up 15% from the year-earlier quarter when sluggish trading activity and losses in its Asia private-equity portfolio caused the firm to post one of its worst quarters in Mr. Gorman's nearly eight years as CEO.

"After a challenging end to 2015, and frankly, a difficult start to this year, Morgan Stanley is back on track," Mr. Gorman said Wednesday.

Revenue in the fixed-income division rose $1.48 billion, nearly triple the year-ago figure, excluding an accounting adjustment related to changes in the value of the firm's debt.

The business has been a perennial weak spot for Morgan Stanley, generating less than half the revenue of its average Wall Street rival over the past few years. The firm has recently laid off 25% of its fixed-income traders, restructured the business and reshuffled top management.

Mr. Pick put his top equities lieutenant, Sam Kellie-Smith, in charge of the bond unit, and has clustered reporting lines for so-called "macro" products, like foreign-exchange and interest rates, and "micro" products like corporate and municipal debt.

In an interview Wednesday, Morgan Stanley Chief Financial Officer Jonathan Pruzan said morale in the unit had improved. "The team now feels more confident, and more clients want to talk to us," he said.

The goal is to create a bond-trading unit just big enough to complement Morgan Stanley's debt-underwriting business without incurring excessive capital charges.

Revenues in stock-trading, a Morgan Stanley strength, rose by 6%, the best performance among big U.S. banks. Fees for merger advice ticked up, offset by a slowdown in initial public offerings.

Morgan Stanley's return on equity, a closely watched measure of profitability, was 8.7%, edging closer to the 10% target that has proved elusive in recent quarters.

Morgan Stanley's wealth-management business posted record revenue of $3.88 billion. That business, along with peers like Bank of America's Merrill Lynch brokerage unit, must adapt to coming regulations that limit what types of products it can sell to certain retail customers. Mr. Pruzan said those changes wouldn't impact profitability of the business.

--

John Carney

contributed to this article.

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

 

(END) Dow Jones Newswires

October 19, 2016 17:07 ET (21:07 GMT)

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