Morgan Stanley profit jumps on bond-trading comeback

[NEW YORK] Morgan Stanley reported a better-than-expected profit on Wednesday, boosted by a surge in bond trading that helped all Wall Street banks last quarter.

Morgan Stanley's gains were especially notable. Its adjusted bond-trading revenue more than doubled, hitting Chief Executive James Gorman's revenue target for that business for the second quarter in a row.

The bank has struggled for years to improve in bond trading, which has volatile revenue and tough capital requirements to meet. Earlier this year, Morgan Stanley restructured the unit, cutting 25 per cent of staff and appointing new leadership.

In an interview, Chief Financial Officer Jonathan Pruzan said the bank is on the right track, though it may be too early to claim victory.

"The success we've had in the last quarter or two has boosted morale and confidence of the team," he said. "But these things take time and until we can do it for years as opposed to quarters, we're not going to declare success."

Though it is still early in the fourth quarter, Pruzan said the trading environment has so far been similar to the end of September.

Overall, Morgan Stanley's earnings applicable to common shareholders rose 62 per cent, to US$1.5 billion from US$939 million in the same quarter a year earlier. Earnings per share rose to 81 cents from 48 cents, helped by stock buybacks.

Analysts had estimated earnings of 63 cents per share, according to Thomson Reuters I/B/E/S.

Revenue rose 15 per cent to US$8.9 billion. Analysts had expected revenue of US$8.2 billion. Non-interest expenses rose just 4 per cent, reflecting a cost-cutting program that Morgan Stanley hopes will shave US$1 billion from annual expenses by next year.

Morgan Stanley's shares rose 0.7 per cent to US$32.55 in premarket trading.

Morgan Stanley wraps up a surprisingly strong quarter for big US banks. Goldman Sachs Group Inc, Morgan Stanley's closest rival, reported a better-than-expected 58 per cent rise in third-quarter profit on Tuesday.

Bond trading was strong across Wall Street, driven by Britain's surprise vote to leave the European Union and bouts of anxiety about monetary policy around the world.

Morgan Stanley's bond-trading revenue rose to US$1.5 billion in the third quarter from US$583 million in the year-ago period, when stripping out accounting gains and losses related to the value of its own bonds.

Despite that rebound, Morgan Stanley posted an 8.7-per cent return on equity, which is less than Gorman's stated target of 9 per cent to 11 per cent by the end of 2017.

Equities sales and trading revenue, a traditional bright spot for the bank, edged up just 1 per cent to US$1.9 billion.

Revenue from investment banking fell about 7 per cent to US$1.23 billion, due to weaker M&A fees and capital markets activity.

Morgan Stanley ranked third to Goldman Sachs and JPMorgan Chase & Co in M&A fees collected during the quarter and fourth behind JPMorgan, Bank of America Corp and Goldman in fees from investment banking, which includes equity and debt underwriting, according to Thomson Reuters data.

Revenue from wealth management, which Morgan Stanley has been building for several years, rose 7 per cent to US$3.9 billion. The business hit a 23 per cent pre-tax margin, in line with Gorman's target for year-end.

REUTERS