Morgan Stanley Posts Higher Profit-- 3rd Update

By Dow Jones Business News, 
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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 prior quarter.

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 year.

"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 Allen.

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 Stanley's peers.

"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 before.

Justin Baer contributed to this article

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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