(Updates with details on unit revenue, comments from Chief Financial Officer Ruth Porat, share movement).
By Saabira Chaudhuri
Morgan Stanley ( MS ) swung to a third-quarter profit, solidly beating analyst estimates, as strong results in the
company's wealth management business helped offset a slump in fixed-income trading revenue.
Shares jumped 2.8% to $29.75 in recent premarket trading. Through Thursday's close, the stock has risen 51% so far
For the quarter, Morgan Stanley reported net income of $906 million, compared with a year-earlier loss of $1.02
billion. The year-ago figures were weighed down by a charge of more than $2 billion related to the mark-to-market
changes in Morgan Stanley debt prices.
The results underscore efforts by Chief Executive James Gorman to transform the New York investment bank into a less
risky, more diversified firm.
At Morgan Stanley, results beat the consensus estimates of analysts polled by Thomson Reuters, standing in contrast to
rival Goldman Sachs Group Inc. ( GS ) which on Thursday sharply missed revenue estimates, disappointing investors.
This year's figures showed progress in the company's move to grow its wealth-management business while reducing its
dependence on its more volatile bond-trading businesses.
Wealth-management revenue rose 8% from a year earlier while fixed-income trading revenue-- excluding DVA--was down 43%
from a year earlier and 27% from the second quarter.
Morgan Stanley has accelerated its push away from trading, closing the final stage of its multiyear deal to buy the
old Smith Barney brokerage business from Citigroup Inc. ( C ) The two banks had previously had a joint venture, but
Citigroup sold its remaining stake to Morgan Stanley in June.
For the third quarter, Morgan Stanley's per-share earnings, which reflect the payment of preferred dividends, were 45
cents compared with a loss of 55 cents a share a year earlier.
Stripping out the impact of changes in the value of the company's own debt, or DVA, per-share earnings were 50 cents
compared with 28 cents a year earlier.
Excluding DVA, revenue rose 7.4% to $8.1 billion. Analysts polled by Thomson Reuters most recently expected per-share
earnings of 40 cents, on revenue of $7.7 billion, both excluding DVA.
In Morgan Stanley's fixed-income trading business, the securities firm posted adjusted revenue--stripping out the DVA
impact--of $835 million compared with $1.46 billion a year earlier and $1.15 billion in the second quarter.
Morgan Stanley's fixed income decline--particularly from the second quarter--is better than rival Goldman Sachs's,
which on Thursday posted fixed income revenue that was 44% lower than the year earlier and 49% below second quarter
levels. While large U.S. banks such as Citigroup Inc. ( C ) and J.P. Morgan Chase (JPM) have all posted weak fixed-income-
trading revenue for the third quarter, Goldman took an especially large hit, in part due to its more narrow base of
large institutional clients.
Morgan Stanley also reported its compensation and benefits expense was about $4 billion, up 1% from the year earlier
but down about 3% from the prior quarter. This stands in stark contrast to Goldman Sachs, which said its compensation
expense fell 35% from the year earlier, helping the bank offset its slumping fixed-income revenue.
In the third quarter, the wealth-management business posted $3.48 billion in net revenue, compared with $3.22 billion
a year ago and $3.53 billion in the prior quarter. When combined with Morgan Stanley's asset-management businesses, the
wealth-management unit in recent quarters has represented about 50% of the company's total revenues, up from a fraction
of that in years past.
The wealth-management unit's margins have also shown sharp improvement since last year, when technology glitches at
the brokerage joint venture hurt results. Morgan Stanley now boasts one of the largest brokerage forces on Wall Street
by financial adviser headcount. Pretax profit margins, a closely watched efficiency metric, jumped in the unit to 19% in
the third quarter, compared with the roughly 7% reported a year ago and 18.5% reported in the second quarter. In recent
months, Mr.Gorman set a margin goal for the unit of 20% to 22% by 2015.
In an interview, Chief Financial Officer Ruth Porat said she feels "very good" about the margin's trend, while also
adding that the increasing cooperation between Morgan Stanley's wealth management and institutional businesses make the
firm well positioned for changes in the regulatory environment.
Morgan Stanley's institutional-securities business, which includes investment banking and sales and trading results,
reported adjusted revenue of $3.86 billion, versus $3.74 billion a year earlier and $4.17 billion in the prior quarter.
Within equities trading, a relatively strong area for the firm in recent years, revenue stood at $1.7 billion versus $
1.3 billion a year earlier as the company saw an uptick in investor activity. The figure was Morgan Stanley's highest
third-quarter equities trading revenue since 2008.
Advisory revenue was $275 million, down from $339 million a year earlier, reflecting a still sluggish climate for
Write to Saabira Chaudhuri at firstname.lastname@example.org
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