Morgan Stanley Trades Its Way Past Goldman -- 2nd Update

By Liz Hoffman 

Morgan Stanley said its quarterly earnings rose 70%, riding big boosts in its debt-trading and underwriting businesses to become the last of the big Wall Street banks to post strong numbers.

Notably, the firm's results, especially in fixed-income trading, were far stronger than those of arch rival Goldman Sachs Group Inc.

Morgan Stanley's shares climbed 2.4% premarket as earnings and revenue beat Wall Street estimates. The firm reported a profit of $1.93 billion, or $1 a share. That compares with $1.13 billion, or 55 cents a share, in the first quarter of 2016, which was a dismal one for big banks.

Revenue grew 25% to $9.75 billion. Analysts polled by Thomson Reuters had expected 88 cents a share in earnings on revenue of $9.27 billion.

The biggest surprise was $1.7 billion in revenue from fixed-income trading, which includes corporate and government bonds, currencies and commodities. Long a trouble spot for Morgan Stanley, the unit is showing steady progress after a leadership change last year, and this quarter outearned Goldman, which reported disappointing trading figures Tuesday.

Morgan Stanley's return on equity, a closely watched measure of profitability, was 10.7% in the quarter, finally clearing -- at least on a quarterly basis -- the 10% target laid out by Chief Executive James Gorman.

"In these types of markets our business performs well," Chief Financial Officer Jonathan Pruzan said in an interview. "We clearly have to prove it the rest of the year."

Few firms on Wall Street benefit more from the combination of rising interest rates and a rising stock market than Morgan Stanley, whose wealth management division manages trillions of dollars of client money across stocks, bonds and other assets.

Nearly every one of its businesses posted stronger numbers: a near-doubling of fixed-income trading revenue, a record profit margin in wealth management driven by loan growth and higher interest rates, and a 131% increase in underwriting fees.

Meanwhile, the firm kept a lid on costs, which ticked up just $100 million, excluding pay, while revenue grew $1.4 billion.

The compensation ratio in its core investment-banking and trading businesses was 36%, below the 37% ceiling Mr. Gorman laid out a year ago. In wealth management, where brokers take home far more of what they bring into the firm, the figure was 57%, above the goal of 56%.

"Solid as a rock," Steven Chubak, an analyst with of Instinet, wrote of Morgan Stanley's earnings.

The wealth-management business posted a 24% profit margin, the highest since Morgan Stanley bought Smith Barney after the financial crisis.

One factor was an 18% increase in interest income, the fruits of a push across the brokerage business to lend more. Mr. Pruzan said loan growth was split roughly evenly across the bank's three main products: mortgages, loans backed by securities portfolios, and tailored loans secured by art, jewelry, hedge-fund stakes and other illiquid valuables.

The shift toward managing the portfolios of millions of Americans is part of Mr. Gorman's plan, now a few years under way, to move Morgan Stanley away from volatile trading and into businesses whose fees don't swing around as much with the market.

Still, the past few months have been challenging in other Morgan Stanley core businesses. Stock-trading, where it is Wall Street's leader, has grappled with lower commissions and more money moving to passive managers that trade less often. Revenue in that division fell 1.9% to $2.02 billion.

But a bright spot was debt-trading, where revenue nearly doubled to $1.71 billion. The business has now posted four straight quarters of at least $1 billion in revenue after Mr. Gorman reorganized the business and shifted two top equities traders to oversee it.

Mr. Pruzan said that corporate bonds, interest-rate products and commodities were busy, while foreign-exchange was slower.

Total sales and trading revenue was $3.5 billion, up 30% from the first quarter of 2016, which was notably weak for Wall Street trading desks.

Investment banking revenue, which include advisory and underwriting fees, rose 43% to $1.42 billion. Triple-digit gains in underwriting more than offset a 16% decline in M&A fees, though Mr. Pruzan said the firm's merger pipeline is higher that it was this time in 2016, which ended up being a record for global deal making.

Morgan Stanley's shares are down 2.5% this year, having given up about half of their postelection gains.

Write to Liz Hoffman at [e-mail]

(END) Dow Jones Newswires

April 19, 2017 08:51 ET (12:51 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.