MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley said Tuesday its third-quarter profit rose 20%, as the Wall Street firm started the final day of a big-bank earnings season that reflected the strength of the U.S. economy in the face of geopolitical turmoil.

The firm, run by Chief Executive and Chairman James Gorman, reported profit of $2.15 billion on $9.87 billion in revenue, both better than a year ago. Earnings per share of $1.17 exceeded the expectations of analysts polled by Refinitiv, who predicted $1.01 per share.

All but one of the major U.S. banks bested expectations in a quarter that is typically a muted one, given the late-summer slowdown. Goldman Sachs Group Inc. also reported sharply higher earnings on Tuesday, driven mostly by bigger dealmaking fees.

Gains came from across the firm, as wealth management continued to rake in client money, the Wall Street businesses of trading and investment banking held up, and Mr. Gorman kept a lid on expenses.

Morgan Stanley is in the late innings of a multiyear turnaround under Mr. Gorman, a matter-of-fact Australian who spent a decade as a McKinsey & Co. consultant before coming to Wall Street. He has pared its freewheeling trading and principal-investing operations -- responsible for billions of dollars in crisis-era losses -- and doubled down on wealth management.

"These strategic choices were designed to ensure that as much as we can control, the firm does well in its strong market environment and demonstrates stability" in tougher times, Mr. Gorman said on a conference call Tuesday morning. "That is exactly how 2018 is shaping up."

Shares rose 5% in early trading, but remain down about 13% year to date, a decline that Mr. Gorman called "bewildering" given the firm's rising revenue and tilt toward the U.S., where the economy is growing steadily.

The beaten-down stock does give the firm more bang for its buck when it buys back stock, Mr. Gorman said. Morgan Stanley repurchased $1.2 billion of shares in the quarter, bringing the number of outstanding shares to a multiyear low and helping to push per-share earnings higher.

The retail brokerage, which manages money for about 3.5 million U.S. households, posted revenue in the quarter of $4.4 billion, up 4% from a year ago. Its assets under management climbed to $2.5 trillion, a record closing in on Bank of America Corp.'s Merrill Lynch unit. The proportion of client assets that sit in steadier, fee-paying accounts -- as opposed to accounts that charge trading commissions -- also continues to rise.

Morgan Stanley's Wall Street businesses held up well despite the seasonal late-summer lull. Trading revenue rose 8% from a year earlier to $3.1 billion, driven by equities, where Morgan Stanley is Wall Street's leader.

Investment banking revenues were 15% higher, driven mostly by stock underwriting, which offset a decline in merger fees.

It was the division's best third quarter in a decade, and Chief Financial Officer Jon Pruzan said the firm's pipeline of unannounced deals was healthy.

Those trading and investment banking businesses -- which Mr. Gorman calls the "engine" to the firm's "ballast," its steadier retail brokerage -- were united earlier this year under executive Ted Pick, who is widely considered a leading contender to replace Mr. Gorman.

The firm's smaller asset-management arm, which oversees about $471 billion in client money across mutual funds, real estate and other investments, posted revenue of $653 million, down slightly from a year ago. Turmoil in emerging markets, set off in August by troubles in Turkey, hit revenues there, Mr. Pruzan said.

The firm's outstanding corporate loans and commitments fell slightly, while deposits rose -- a move that, if it continues, could leave Morgan Stanley on the wrong side of rising interest rates.

While Morgan Stanley isn't a giant Main Street bank like JPMorgan Chase & Co. or Bank of America Corp., it has been trying to grow loans and deposits in tandem. It has begun offering certificates of deposit to lure clients' spare cash, while a joint venture with Japan's Mitsubishi UFJ Financial Group gives Morgan Stanley deeper lending pockets.

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

(END) Dow Jones Newswires

October 16, 2018 09:47 ET (13:47 GMT)

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