By Liz Hoffman 

Morgan Stanley's second-quarter earnings rose 45% during a stretch when the coronavirus ripped through the U.S. economy and financial markets.

The bank reported revenue of $13.4 billion and profit of $3.2 billion, or $1.96 per share, on Thursday. Both were quarterly records for the firm and well above the expectations of Wall Street analysts, who had predicted profit of $1.77 billion, or $1.12 per share.

Morgan Stanley and Bank of America Corp. were the last of the big U.S. banks to report financial results for a period that posed the biggest test of the financial system since 2008. Results shook out along recognizable lines: Big commercial and consumer lenders like JPMorgan Chase & Co. and Bank of America took provisions for loan losses that dragged down earnings, while a surge in securities trading and underwriting favored Wall Street-heavier firms such as Morgan Stanley and Goldman Sachs Group Inc.

"It's a testament to the business model, which we think is the right business model for a longer period of time, but particularly for this environment," Chief Financial Officer Jonathan Pruzan said in an interview.

Morgan Stanley also has the country's largest wealth-management brokerage, which brought in $4.7 billion in revenue during the second quarter. Chief Executive James Gorman calls the unit, which clips fees managing nearly $2.7 trillion of clients' money, a ballast that steadies the firm while its Wall Street businesses of deals and trades provide the power.

That engine purred in the second quarter. Morgan Stanley's trading revenue rose 68% from the same period a year ago, more than doubling in debt trading. Its investment bankers generated $1.6 billion in revenue helping companies sell stock and debt to the public, two-thirds higher than a year ago.

Mr. Gorman, who himself contracted Covid-19 earlier this year, said in a statement, "The second quarter tested the model and we performed exceedingly well."

Mr. Pruzan said the firm had "consciously avoided consumer credit" as well as commercial banking, which means it is less exposed to a wave of defaults that looks increasingly likely as much of the U.S. economy remains shut down.

The bank's return on equity, a measure of how profitably it invests shareholders' money, rose to 15.7%, above the high end of a target range set last year by Mr. Gorman. Morgan Stanley also remains comfortably above a minimum capital level it will have to hit starting this fall.

Investors will be looking for an update on Morgan Stanley's pending acquisition of E*Trade Financial Corp., which is expected to be completed late this year. The deal, struck just before the pandemic hit and valued at the time at $13 billion, is meant to bring in new clients to the firm's wealth arm, upgrade Morgan Stanley's technology, and introduce the blue-blooded firm to a younger generation of investors.

Though it is known for its dot-com vibe and quirky television ads, E*Trade's crown jewel is a lower-key business: managing the stock that employees at hundreds of companies receive as part of their pay. Those shares are typically locked up for a few years and when they become available, Morgan Stanley aims to move those employees into brokerage accounts.

The deal will also bring some $38 billion in deposits. Morgan Stanley, which doesn't have branches or traditional bank accounts, has been trying to grow deposits as a low-cost source of funding. That is more crucial than ever as the pandemic -- and the recession that is likely to stretch on -- puts stress on banks' finances.

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

 

(END) Dow Jones Newswires

July 16, 2020 08:20 ET (12:20 GMT)

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