By Tanya Agrawal and Lauren Tara LaCapra
(Reuters) - Morgan Stanley (N:MS) reported an 87 percent rise in third-quarter earnings as the Wall Street bank's trading, investment banking and wealth management businesses benefited from increased client activity and a hot equity market.
The bank's shares were up 2.7 percent at $33.40 in morning trading on Friday as both profit and revenue handily beat analysts' average forecast.
The results show that even though Morgan Stanley has been focusing on its wealth management business since the financial crisis, its traditional investment banking operation can still have a big impact on its earnings.
Morgan Stanley, which worked on Alibaba Group's (N:BABA) record $25 billion initial public offering, topped the list of IPO underwriters globally in the first nine months of 2014, the busiest period for stock offerings since 2007. The bank's equity underwriting revenue almost doubled to $464 million.
Overall institutional securities revenue, which encompasses trading and investment banking, jumped 22 percent to $4.52 billion.
The bank's bond operation got a boost last month when upbeat U.S. economic data, stimulus steps in Europe, and the shock exit of trading superstar Bill Gross from bond trading giant Pimco gave what had been a listless market a shot in the arm.
Excluding accounting adjustments, bond trading revenue jumped 19.4 percent to $997 million. However, that paled against the 53 percent growth achieved by archrival Goldman Sachs Group Inc (N:GS), excluding accounting adjustments.
Like several other big banks, Morgan Stanley has been shrinking its presence in the bond market as tougher capital requirements against risky trading take hold.
That has given Goldman an opportunity to grab market share.
RETURN ON EQUITY SLIPS
Wealth management revenue rose 9 percent to $3.79 billion, but accounted for 42.5 percent of Morgan Stanley's total revenue, compared with 50.7 percent for the bank's trading and investment banking business.
The business achieved a pretax profit margin of 22 percent, above Chief Executive James Gorman's minimum target of 20 percent and the 21 percent reported for the second quarter.
Even with the strong results in the quarter, the bank's adjusted return-on-equity slipped to 9 percent, below both the 10 percent minimum Gorman wants to achieve and the 10.7 percent return in the second quarter.
Gorman said on a conference call with analysts that the bank was looking for ways to improve earnings and return-on-equity beyond previously announced plans.
However, Chief Financial Officer Ruth Porat said on the call that choppy markets have been a challenge so far in the fourth quarter, and that "structural headwinds" in certain commodity markets were hurting revenue.
Net income attributable to common shareholders rose to $1.65 billion, or 84 cents per share, Morgan Stanley said.
On an adjusted basis, the bank earned 65 cents per share, according to Thomson Reuters I/B/E/S. On this basis, analysts had expected earnings of 54 cents per share.
Net revenue, excluding adjustments, rose 7 percent to $8.69 billion, beating the average estimate of $8.17 billion.
(Reporting by Tanya Agrawal and Lauren Tara LaCapra; Editing by Ted Kerr)