MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley said its second-quarter earnings rose 39% from a year ago, concluding a big-bank earnings season that showed continued strength in the economy.

The smallest of the big six U.S. banks by assets reported $2.4 billion in profits on $10.6 billion revenue. On a per-share basis, Morgan Stanley's earnings of $1.30 beat the $1.11 expected by analysts. Revenue also beat expectations of analysts polled by Thomson Reuters by about $500 million.

The firm, run by Chief Executive James Gorman, is in the late innings of a multiyear turnaround effort. Mr. Gorman's push into wealth management -- Morgan Stanley manages $2.4 trillion on behalf of 3.5 million U.S. households -- has steadied its earnings and reassured investors, who had stayed away after repeated burns.

Among firms with big trading and investment-banking businesses, only JPMorgan Chase & Co. shares are more expensive, relative to book value, according to data from FactSet.

Steady economic growth, lower taxes and some renewed volatility in asset prices have all helped big banks this year. Goldman Sachs Group Inc., Morgan Stanley's closest peer, on Tuesday reported its best first half in nine years. Both firms have big businesses brokering corporate mergers, underwriting securities, and trading on behalf of hedge funds and other investors.

Morgan Stanley's return on equity, a measure of how profitably it invests shareholders' money, stood at 13% in the quarter, exactly the goal Mr. Gorman had set -- though with an assist from the lower taxes.

Escalating global tensions, trade battles and a shrinking gap between the cost of short- and long-term debt -- often a signal of a coming economic pullback -- haven't spooked the investment funds and corporations that use banks such as Morgan Stanley to trade securities, advise on deals, and arrange financing.

"The economic data is still pretty healthy," Morgan Stanley's finance chief, Jonathan Pruzan, said in an interview Tuesday. "Corporations feel good, consumers feel good. The pockets of volatility seem to be isolated and not rolling over into the broader market.

"So far it hasn't caused our clients to be less active," he continued. "If it starts to put people in defensive mode, we'll have different second half of the year."

Morgan Stanley's stock-trading business, which is the biggest on Wall Street by market share, reported $2.5 billion in revenue, up 21% from a year ago. Goldman was flat year over year in that business, while rivals including JPMorgan and Citigroup Inc. saw revenue rise by double digits.

Fixed-income trading, a business where Morgan Stanley has cut back and refocused on fewer products, rose 13% to $1.4 billion. Commodities and loan-trading were both strong, the firm said.

Revenue from advising on corporate mergers rose 19% to $618 million, while underwriting revenues were up 10%, to $1.1 billion. Morgan Stanley landed on most of the quarter's IPO prizes, leading the $1 billion debut of Dutch payments firm Adyen NV and the unusual listing of Spotify Technologies Inc.

Those trading and investment-banking businesses now both fall under the purview of Ted Pick. The 49-year-old, who had run trading, in recent weeks was also given oversight of banking, a sign that he's a leading contender to eventually succeed Mr. Gorman.

The firm's retail brokerage produced $4.3 billion in revenue, up slightly from a year ago. Assets under management held steady from last quarter at $2.4 trillion, as inflows of new money offset market declines. Morgan Stanley charges a flat fee, usually around 1%, on many of its accounts, meaning its revenues are closely tied to the value of its client portfolios.

It also has been trying to lend more, pushing mortgages and securities-backed loans through its 15,600 brokers. Outstanding loans to wealth clients rose to a record $70 billion. Broker headcount continues to shrink as an older workforce retires and Morgan Stanley leans more heavily on technology.

The firm's smallest division, asset management, posted a 11% rise in revenue. Mr. Gorman has a soft spot for that business -- which accounts for just 7% of the firm's overall revenue but requires little capital to run -- and is aiming to grow it, in part through acquisitions.

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

(END) Dow Jones Newswires

July 18, 2018 08:19 ET (12:19 GMT)

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