Morgan Stanley ( MS ) needed this one.
The securities firm swung to a third-quarter profit, bolstered by gains in wealth management and equity trading. And
for the first time in two years, its quarterly revenue surpassed long-time Wall Street rival Goldman Sachs Group Inc.
( GS )
The results may help vindicate James Gorman, Morgan Stanley's chief executive, for the path he has led the New York-
based firm down since the financial crisis. In contrast to Goldman, Morgan Stanley has pushed aggressively into the
wealth management business, while toning down the risk of its trading divisions.
While Goldman might come storming back, especially if bond trading rebounds, this quarter was Mr. Gorman's. Morgan
Stanley reported net income of $906 million, compared with a year-earlier loss of $1.02 billion that was weighed down by
an accounting-related charge.
Morgan Stanley's revenue of $7.9 billion exceeded Goldman's quarterly revenue by more than a $1 billion, the first
time that has happened since 2011.
"I think it was getting to the point where investors and the board need to see some more tangible progress" at Morgan
Stanley, said Jeff Harte, an analyst at Sandler O'Neill + Partners. "The progress they've shown in 2013 is shining in a
pretty positive light."
Shares jumped 2.8% to $29.75 in early trading. Through Thursday's close, the firm's shares have climbed 51% in 2013, a
much needed boost after several years of sluggish stock-price performance.
Morgan Stanley's third-quarter results beat the consensus estimates of analysts polled by Thomson Reuters. Goldman's
per-share profit also exceeded expectations, though the 20% revenue drop at Goldman left many investors disappointed.
Morgan Stanley's results underscored efforts by Mr. Gorman to transform the New York investment bank into a firm that
takes fewer risks and delivers more consistent profits. Indeed, a major reason Morgan Stanley outperformed Goldman this
quarter is because its fixed income unit is smaller, so the industrywide slump during the quarter delivered less pain to
Still, fixed-income trading revenue--excluding accounting adjustments tied to Morgan's debt prices--was down 43% from
a year earlier and 27% from the second quarter.
Meanwhile, the wealth-management business, a key part of the overhaul, showed revenue growth of 8% from a year
earlier. Morgan Stanley closed the final stage of its multiyear deal to buy the old Smith Barney brokerage business from
Citigroup Inc. ( C ) 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 accounting-related moves tied to Morgan Stanley debt valuation adjustments, or DVA, per-share
earnings grew to 50 cents from 28 cents a year earlier.
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 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, which said its compensation expense
fell 35% from the year earlier.
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 made up about 54% of the company's total revenue, 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.
"This is further evidence that owning all of Smith Barney will help the bottom line," Mr. Harte said.
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.
In investment banking, advisory revenue was $275 million, down from $339 million a year earlier, reflecting a still
sluggish climate for deals.
Write to Justin Baer and Saabira Chaudhuri at Justin.Baer@wsj.com and Saabira.Chaudhuri@wsj.com
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