By Saabira Chaudhuri
Morgan Stanley said second-quarter profit nearly doubled as continued strong results from the wealth-management and
investment-banking businesses helped offset a slump in trading revenue.
The results were the latest in a bank earnings season in which a June pickup in trading helped several banks exceed
analyst earnings expectations for the quarter.
Morgan Stanley, the last of the six large U.S. banks to report earnings, saw shares rise 1.3% in recent trading as
results beat analyst estimates.
Morgan Stanley's strong results show that the firm's turnaround under Chief Executive James Gorman is continuing to
gain steam as the wealth management business enjoys rising markets and fatter margins.
Shares of Morgan Stanley have risen about 23% in the past year, which is better than the performance logged by the
other five large U.S. banks. In the second quarter, the firm's equities-trading business held up better than that of
rivals, with revenue besting that of Goldman Sachs Group Inc. Chief Financial Officer Ruth Porat in an interview said
the equities arm was helped by strong results in prime brokerage, mitigated by a drop in derivatives trading.
For the quarter, Morgan Stanley reported a profit of $1.94 billion, up 97% from the year-earlier profit of $980
million. On a per-share basis, Morgan Stanley's profit was 94 cents, or 60 cents when stripping out accounting
adjustments and adjusting for a $609 million tax benefit. Analysts polled by Thomson Reuters had expected adjusted
earnings of 55 cents a share.
On the tax benefit, Ms. Porat said Morgan Stanley is nearing the completion of a yearslong tax review that has
allowed it to release some reserves it previously set aside for tax issues.
Revenue edged up 1.1% to $8.61 billion. Revenue excluding accounting adjustments rose 2.2% to $8.52 billion, coming
in above analyst estimates for $8.19 billion.
Though Morgan Stanley has a smaller fixed-income, currencies and commodities arm than some of its peers, the
unusually slow markets still dented the firm's results. Excluding certain accounting adjustments, FICC revenue fell 12%
to $1.01 billion from a year earlier.
Ms. Porat said the drop was driven entirely by lower foreign-exchange-trading revenue, and added that credit
products did well in the quarter. Like other firms, Morgan Stanley saw trading activity pick up a bit in June, but Ms.
Porat said it is "too early to call" whether this would continue.
The New York investment bank, whose trading arm is more heavily weighted toward equities than that of its rivals,
basically maintained flat revenue in that unit, despite a broad slump in trading volume during the quarter. The firm's
equities-trading business continued to gain momentum against the firm's most direct rival, Goldman Sachs. Morgan's
revenue in the business came in at $1.79 billion, down from $1.80 billion in the year-earlier quarter. Goldman meanwhile
reported equities trading revenue of $1.63 billion.
Morgan Stanley continued to benefit from a deal-making environment that is improving as corporate executives grow
more confident about the economy. The firm's investment banking division generated advisory revenue of $418 million, up
from $333 million a year-ago and from the $336 million reported in the first quarter. Meanwhile, debt underwriting
revenue rose 26% to $525 million from $418 million and equity-underwriting revenue jumped 50% to $489 million from $327
million a year earlier.
The growth comes as Morgan Stanley and other large banks battle boutiques that are taking more market share. Former
Morgan Stanley investment-banking chief Paul Taubman, for example, has won some business on his own after leaving and
recently started hiring ex-colleagues as he gears up to start a new firm.
Morgan Stanley's institutional-securities business, which includes investment banking and sales and trading
results, reported adjusted revenue down at $4.16 billion, from $4.18 billion a year earlier and $4.50 billion in the
The firm's FICC trading woes were offset by its wealth-management business, which again delivered strong results.
Revenue in that division rose 5.2% from a year earlier to $3.72 billion, in line with analyst expectations.
The wealth-management unit's pretax profit margins, a closely watched efficiency metric, jumped to 21% in the
second quarter, compared with the 18.5% reported a year ago and 19% in the first quarter. Analysts had widely expected
the margin to improve sequentially as compensation accruals drop from the seasonally higher levels shown in the first
quarter. Morgan Stanley is now close to the target pretax profit margin of 22%-25% it set earlier for the end of next
"Overall it was a solid quarter, with global wealth management and institutional securities outperforming relative
to expectations, offsetting slightly weaker than expected results in asset management," said Evercore analyst Chris
Asset management revenue rose 9% from a year earlier to $2.63 billion.
During the quarter, Morgan Stanley showed some progress in reining in expenses. Overall, noninterest expense was $
6.62 billion, down 1.4% from the year earlier but flat from the first quarter.
"We think the Morgan Stanley" story is playing out how owners would like, " said ISI analyst Glenn Schorr, noting
that wealth and asset management were 50% of Morgan Stanley's revenue this quarter.
Morgan Stanley has worked to slim down its fixed-income business and focus more on wealth management and equities
trading, businesses that gives it more stable revenue. That strategy has paid off in recent quarter as the firm has
largely shrugged off the impact of a broad slump in bond trading revenue that has pummeled profits for many of Morgan
"We've often said what has been most profound about Morgan Stanley in the past few years has been our
repositioning," said Ms. Porat, noting that fixed-income trading is a much smaller business for Morgan Stanley now than
Justin Baer contributed to this article
Write to Saabira Chaudhuri at firstname.lastname@example.org
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
Copyright (c) 2014 Dow Jones & Company, Inc.