By Liz Hoffman and John Carney
Morgan Stanley said its quarterly earnings rose 57%, beating
expectations, as the big Wall Street firm benefited from a trading
rebound that has helped the country's largest banks.
The New York-based firm reported a profit of $1.6 billion, or 81
cents a share. That compares with the $1.02 billion, or 48 cents a
share, it reported in the same period last year. Excluding
accounting adjustments, earnings in the year-earlier period were 34
cents a share.
Revenue grew 15% to $8.91 billion from $7.77 billion a year
earlier, when sluggish trading activity and losses in its Asia
private-equity portfolio caused Morgan Stanley to post one of its
worst quarters under Chief Executive and Chairman James Gorman.
Analysts polled by Thomson Reuters had expected Morgan Stanley
to earn 63 cents a share on revenue of $8.17 billion.
Shares edged up 1.3% premarket. The stock has outperformed its
biggest peers since midsummer, up 24% since July 1, and are roughly
flat on the year.
The firm's return on equity, a closely watched measure of
profitability, was 8.7% in the third quarter, versus 5.6% a year
ago. That is edging closer to Mr. Gorman's goal of 10% in 2017, but
the firm has shown unsteady progress toward meeting it.
Last among big banks to report third-quarter earnings, Morgan
Stanley faced generally high expectations. Rivals reported strong
results in their trading and investment banking businesses,
strengths at Morgan Stanley.
Both those gains were led by fixed income, where Morgan Stanley
is weakest. Stock trading, Morgan Stanley's strength, was down
sharply at Bank of America Corp. and Citigroup Inc.
Morgan Stanley bucked that trend and turned in the best
year-over-year performance in fixed-income trading. Revenue from
trading bonds, currencies and commodities surged 61% to $1.48
billion. Equities revenue edged up 0.7% from last year to $1.88
billion.
Morgan Stanley makes more money in stock trading than any of its
rivals, but has struggled to build a consistently profitable
business trading corporate and government debt securities,
currencies or commodities. It recently laid off 25% of its
fixed-income traders and set a soft target of $1 billion a quarter
in fixed-income revenue, a level it has now exceeded two quarters
in a row.
Mr. Gorman, who shook up management in the firm's trading
business last year, is working toward what he has called a
"credible and critical" bond-trading unit -- just big enough to
support clients and Morgan Stanley's large debt-underwriting
business without overextending the firm's balance sheet.
Its second quarter of $1 billion-plus revenue in fixed-income --
albeit in a strong quarter for that business everywhere -- is a win
for Edward Pick, the former equities trader whom Mr. Gorman tapped
last fall to turn around the struggling unit.
Morgan Stanley finance chief Jonathan Pruzan cited mortgage
bonds, interest rate products and commodities as sources of trading
strength in the quarter. Those trends have continued, according to
Mr. Pruzan. "The first few weeks of the fourth quarter feel a lot
like the last couple weeks of September," he said.
Investment banking revenue, which includes merger advisory and
underwriting fees, fell 6.5% to $1.1 billion from a year
earlier.
Within that division, fees from stock and stock-linked offerings
fell 11% amid a dearth of initial public offerings, which has been
felt hard at Morgan Stanley, a top-two underwriter in Silicon
Valley.
Fees from debt sales rose 5.5% to $364 million. Fees for merger
advice, where Morgan Stanley typically ranks No. 2 in the U.S.,
rose 1.4% to $504 million. That figure at its closest peer, Goldman
Sachs Group Inc., fell 19%.
In wealth-management, revenue rose 6.6% to $3.88 billion, a
quarterly record. The unit's profit margin was 23%, above Mr.
Gorman's publicly stated target of 22%.
Boosting the brokerage business is part of Mr. Gorman's plan,
now a few years under way, to move Morgan Stanley away from
volatile trading and into more stable areas like wealth management.
The firm has recently taken steps to bolster the division, like
offering higher-yielding savings accounts to lure deposits and
encouraging its brokers to offer mortgages to boost revenue.
That plan generally has broad support among investors. In the
past five years, Morgan Stanley shares have outperformed Goldman
Sachs by about 40 percentage points, narrowing the market value gap
between the two to less than $10 billion.
One shareholder in particular likes the plan: activist hedge
fund ValueAct Capital LP, which took a 2% stake in Morgan Stanley
this summer and has privately urged management to push further into
wealth management, people familiar with the matter have said.
Investment management revenue more than doubled to $552 million.
That division, whose chief, Dan Simkowitz, is about a year into the
job, is Morgan Stanley's smallest and has grappled with a shift
toward passive investing and new regulations affecting money-market
funds.
Firmwide expenses, excluding interest, rose to $6.53 billion
from $6.43 billion last quarter. Morgan Stanley is under pressure
to trim costs, and Mr. Gorman has promised $1 billion in cuts by
mid-2017. He has made progress so far by revamping the firm's
procurement system, moving some jobs to lower-cost cities like
Bangalore and Baltimore, and combining data centers.
Compensation, the largest single cost item, stood at $11.8
billion, or 46% of revenue, through the first nine months of the
year, down from $12.37 billion, or 49% of revenue, this time last
year.
Write to Liz Hoffman at liz.hoffman@wsj.com and John Carney at
john.carney@wsj.com
(END) Dow Jones Newswires
October 19, 2016 08:10 ET (12:10 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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