MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley on Wednesday reported record revenue and quarterly profits thanks to a combination of strong trading results and the benefit of lower taxes, the last of the big U.S. banks to post a strong start to the year.

The Wall Street firm's profits of $2.58 billion on revenues of $11.08 billion were both all-time highs, after accounting adjustments in prior periods and reflecting businesses Morgan Stanley has since sold. Both figures and easily beat the average analyst's estimate of $2.2 billion in earnings and $10.36 billion in revenue, according to Thomson Reuters.

Morgan Stanley's traders had their best quarter since the financial crisis, catching the wave of market volatility that also pushed rivals' trading revenues higher. Revenue in the firm's giant retail brokerage increased 8% from a year ago. Fees from advising on mergers and underwriting securities also rose.

"Everything worked," Chief Financial Officer Jonathan Pruzan said in an interview. But he noted that the second half of the quarter felt weaker as trade unease and political noise intensified. "We'll have to see how the year plays out."

Morgan Stanley is in the late innings of a revamp designed to make its revenues more predictable and decrease risk. It has doubled down on fee-based businesses like wealth management and eased its reliance on trading commissions and principal investments.

The firm in January set out new financial targets, most of which appear easily in reach, especially given the impact of the tax-code overhaul that took effect this year. Morgan Stanley's return on equity of 14.9% is a postcrisis high, and easily beats the 13% goal Mr. Gorman laid out in January -- though with a big assist from the cut in the corporate tax rate.

Shares advanced 2.5% to $54.55 in premarket trading. They touched a 10-year high of nearly $59 in mid-March before paring gains as fears of an escalating trade war weighed on the stock market.

Quarterly expectations for Morgan Stanley, the smallest of the Wall Street firms and last of the big banks to report its earnings, had been relatively high. That was due to strong results at rivals including JPMorgan Chase & Co. and Goldman Sachs Group Inc. Wall Street trading desks hummed as markets gyrated early in the quarter, and rising interest rates boosted the value of everything from adjustable mortgages to big corporate loans.

The market's wild ride aided Morgan Stanley's stock-trading business, the biggest on Wall Street by annual revenues. Revenue was up 27%, in line with gains reported by others. Prime-brokerage balances rose and equity derivatives, instruments that protect investors from swings in stock prices, were especially strong, Mr. Pruzan said.

The firm's fixed-income revenue rose 9% to $1.8 billion, its best quarterly tally in three years. Currencies and commodities trading were stronger, while loans, bonds and interest-rate products were weaker as spreads -- the gap between buyers' asking prices and sellers' offers -- tightened, the firm said.

"We finally had an environment with more debate and more volatility around asset prices," Mr. Pruzan said.

Wealth management revenues increased 8% as client assets tailed off slightly from the fourth quarter, to $2.37 billion. Pretax profit margins held steady after last year hitting Mr. Gorman's goal of 25%. They have more than tripled in recent years as the firm has pushed mortgages and other loans to its clients and ridden a bull market to higher management fees.

Revenue from advising on corporate mergers rose 16% to $574 million, while underwriting revenues gained 2%. Morgan Stanley missed the biggest underwriting prizes of the quarter -- those went to Goldman on Dropbox Inc.'s initial public offering, and Bank of America Corp. on a real-estate investment trust's debut -- but it pocketed more than $9 million for leading the IPO of home-security firm ADT Inc., according to filings.

Asset management, a small but high-return business, reported an 18% rise in revenue. Mr. Gorman has made growing that unit a priority.

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

(END) Dow Jones Newswires

April 18, 2018 08:35 ET (12:35 GMT)

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