Morgan Stanley CEO: We're Back on Track -- 4th Update
October 19 2016 - 5:22PM
Dow Jones News
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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