Morgan Stanley profit up 87% as trading activity rebounds

Morgan Stanley reported an 87 per cent rise in third-quarter earnings on Friday as the Wall Street bank's trading, investment banking and wealth management businesses benefited from increased client activity and a hot equity market.

Morgan Stanley’s shares rose 4 per cent to $33.85 in premarket trading as both profit and revenue handily beat market expectations.

The bank has been reducing its exposure to the volatile trading business and its increasingly burdensome regulations, and has been concentrating instead on wealth management as a way to achieve a more stable source of revenue.

But it was a surge in revenue from bond trading and fees for underwriting IPOs and advising on takeovers that were mainly responsible for the surge in earnings in the latest quarter.

Bond trading revenue, excluding accounting adjustments, rose 19.4 per cent to $997 million after a sudden increase in market volatility last month that also boosted its Wall Street rivals.

Equity underwriting almost doubled to $464 million, helped by a booming market for initial public offerings. Morgan Stanley was among the banks involved in Alibaba’s $25 billion IPO - the biggest in history.

Overall institutional securities revenue, which includes trading and investment banking, rose 22 per cent to $4.52 billion.

Wealth management revenue rose 9 per cent to $3.79 billion, but accounted for 42.5 per cent of Morgan Stanley’s total revenue, compared with 50.7 per cent for the bank’s traditional trading and investment banking business.

After a long period of sluggish activity, the bond market was jolted to life in September by upbeat US economic data, stimulus steps taken in Europe, and the shock exit of trading superstar Bill Gross from bond trading giant Pimco.

But the growth achieved by Morgan Stanley paled against that of close rival Goldman Sachs. Excluding accounting adjustments, Goldman reported a 53 per cent jump in revenue from trading bonds, currencies and commodities.

Like several other big banks, Morgan Stanley has been shrinking its bond trading business, giving Goldman an opportunity to take market share.

"We are well positioned to create superior returns for our shareholders, particularly as the US economy continues to strengthen," chief executive and chairman James Gorman said in a statement.

Total revenue rose 12 per cent to $8.91 billion.

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 calculations by Thomson Reuters I/B/E/S. On this basis, analysts had expected earnings of 54 cents per share.

Morgan Stanley’s wealth-management business achieved a pretax profit margin of 22 per cent, above the 20 per cent that Mr James Gorman has set as a minimum target and the 21 per cent reported for the second quarter.

Still, the bank’s adjusted return-on-equity was 9 per cent in the quarter, below both the 10 per cent minimum Mr Gorman is trying to achieve and the 10.7 per cent return in the second quarter.

Reuters