Morgan Stanley quarterly profit jumps on stock trading

PUBLISHED : Friday, 19 July, 2013, 2:43pm
UPDATED : Friday, 19 July, 2013, 2:43pm

Morgan Stanley posted a 42 per cent increase in quarterly profit on Thursday as stock trading revenue soared, and the bank announced its first buyback plan since the financial crisis, in the latest signs that the No. 2 US investment bank is regaining its footing.

Income rose in all the bank’s businesses. Profit from trading and investment banking nearly sextupled, excluding adjustments and before taxes, helped by stronger results in areas including foreign exchange and stocks. Profit for Morgan Stanley in wealth management jumped 83 per cent. The bank’s shares rose 5 per cent to their highest level since 2011.

Chief Executive James Gorman has been trying to turn around Morgan Stanley since he stepped into his role in 2010, after the bank suffered big losses during the financial crisis.

But he still has work to do: the bank’s return on equity was just 5.2 per cent in the latest quarter, less than half of what investors expect. Rival Goldman Sachs, the No. 1 US investment bank, posted a return on equity of 10.5 per cent in the same period.

Investors shrugged off Morgan Stanley’s return on equity and focused instead on the bank’s winning regulatory approval to buy back US$500 million of shares, the first repurchases since 2008.

“Morgan Stanley has been a turnaround story and I think this buyback is an indication that they’re at the next phase of their development,” said Kenneth Leon, analyst with S&P Capital IQ.

Net income attributable to common shareholders rose to US$802 million, or 41 cents per share, in the second quarter, from US$564 million or 29 cents per share a year earlier.

Excluding special items, Morgan Stanley earned 45 cents per share, beating analysts’ average estimate of 43 cents, according to Thomson Reuters I/B/E/S.

The latest results included a gain related to changes in the value of the bank’s own debt, largely offset by a charge from buying Citigroup’s remaining share of the wealth management business.

Revenue rose 22 per cent to US$8.50 billion, while expenses rose 12 per cent to US$6.73 billion, signaling that the bank is keeping a lid on cost growth.

Morgan Stanley has achieved its targets for expenses, Ruth Porat, the bank’s chief financial officer, said in an interview with Reuters.

“But we are continuing to focus on expense reduction. There’s more to do,” she added.

Morgan Stanley is the last of the big five Wall Street banks to report second-quarter earnings.

Like Goldman Sachs, JPMorgan Chase, Bank of America and Citigroup, Morgan Stanley easily beat analysts’ profit expectations, thanks largely to strength in trading and underwriting early in the quarter before bond yields spiked.

Higher yields can cut in to client demand to issue bonds, and can reduce trading volume if investors rush for the sidelines.

Even with a sluggish economy, big banks have been turning in strong profit growth in the second quarter, in part because of cost-cutting, and partly because last year’s trading results were hammered by the European debt crisis.

Morgan Stanley’s strategy for improving returns in its fixed-income business includes reducing assets there. Adjusting for risk, it had hoped to reduce those assets to less than US$255 billion by the end of this year, but it reached that goal in the first quarter.

At the end of the second quarter, its risk-weighted assets in fixed-income trading were US$239 billion, close to the bank’s goal of US$235 billion by the end of next year.

“We’re well ahead of our targets,” Porat told Reuters.

Reducing assets in fixed-income trading will also help the bank meet leverage requirements under proposed new US rules, Porat said on a conference call. The bank’s leverage ratio, which compares equity to assets, was about 4.2 per cent at the end of the second quarter. The proposed requirement is 5 per cent; Morgan Stanley believes it can meet that level by 2015.

Stock trading revenue jumped to US$1.8 billion from US$1.3 billion a year earlier, excluding the debt valuation adjustment, or DVA, which reflects gains and losses on banks’ own debt.

Revenue from fixed income and commodities trading rose 50 per cent to US$1.15 billion, excluding DVA.

Last year’s figures were hurt by a downgrade of the bank by Moody’s Investors Service in June. Anticipation of the downgrade during the quarter cut in to Morgan Stanley’s bond trading revenue in particular.

Morgan Stanley had set a quarterly revenue benchmark for fixed income and commodities trading revenue of US$1.5 billion, saying this is necessary to meet its cost of capital following a disappointing first quarter.

As with its rivals, underwriting was a bright spot in the second quarter. Debt underwriting revenue rose 24 per cent to US$418 million, while equity underwriting revenue increased 16 per cent to US$327 million.

Advisory revenue rose 27 per cent to US$333 million despite weak M&A activity.

In investment banking and trading businesses, the bank’s pretax income was US$785 million, excluding debt valuation adjustments, up from US$138 million in the same quarter last year.

Wealth management revenue rose 10 per cent to US$3.53 billion, and profit for the group attributable to Morgan Stanley rose to US$326 million from US$178 million. The pretax margin rose to 18.5 per cent, moving closer to Gorman’s target of at least 20 per cent by 2015.