Oct. 21 (Bloomberg) -- Morgan Stanley rose on the New York Stock Exchange after an increase in risk-taking boosted trading revenue and contributed to the bank’s first profit in a year.

Third-quarter earnings were $757 million, or 38 cents a share, compared with $7.7 billion, or $6.97, a year earlier, the New York-based company said today in a statement. The average estimate of 21 analysts surveyed by Bloomberg was for earnings per share of 30 cents. The stock gained $1.56, or 4.8 percent, to $34.08, after rising as high as $35 earlier today.

Chairman and Chief Executive Officer John Mack, who plans to hand off his CEO duties to Co-President James Gorman at the end of the year, increased risk-taking after profit in the first half of 2009 fell short of competitors including Goldman Sachs Group Inc. Value-at-Risk, a measure of how much the bank estimates it could lose in a single day of trading, climbed to $118 million, the highest level in at least seven quarters.

“This puts them back on the winning side,” Gary Townsend, chief executive officer of Hill-Townsend Capital LLC, said in a Bloomberg Television interview. “If we are moving into an economic expansion, it seems to me that they have been risk- averse and can afford to take additional risk as markets calm.”

Morgan Stanley, which has more than doubled this year in New York trading, is still below where it traded 13 months ago before Lehman Brothers Holdings Inc. went bankrupt.

Goldman’s Profit

Goldman Sachs, Morgan Stanley’s larger rival, last week said third-quarter profit more than tripled to $3.19 billion, on trading gains and investments with the firm’s own money. Goldman’s value at risk for the period was $208 million, down from a record $245 million in the second quarter.

Wells Fargo & Co., the nation’s biggest home lender, posted a record third-quarter profit today by limiting loan defaults and wringing savings out of its Wachovia Corp. acquisition.

JPMorgan Chase & Co., the second-biggest U.S. bank by assets, last week reported a surge in profit to $3.59 billion that was driven by gains at the investment bank. Bank of America Corp., the biggest U.S. lender, said it lost $1 billion in the quarter, while Citigroup Inc., the No. 3 bank, reported a $101 million profit.

“Bread-and-butter banking is still kind of unclear, but capital markets seems to be relatively strong,” said Kenneth Crawford, a senior portfolio manager at Argent Capital Management LLC in St. Louis, which oversees about $800 million and doesn’t own Morgan Stanley stock.

Book Value

Revenue at Morgan Stanley fell to $8.7 billion from $18 billion a year earlier. Book value per share declined to $27.05 from $27.21 at the end of June. The firm’s return on equity, a measure of how well it reinvests earnings, was 5.8 percent.

Morgan Stanley’s revenue was cut by about $900 million because of an accounting charge related to an improvement in the firm’s debt, which increases the value of its liabilities. The firm has another $1.2 billion of writedowns before it unwinds all the gains it booked last year when the value of the firm’s debt plunged, Chief Financial Officer Colm Kelleher said in an interview today.

Morgan Stanley set aside $10.9 billion for compensation and benefits in the first nine months of the year, or 64 percent of revenue. The number of employees at the company surged earlier this year because Morgan Stanley took control of a brokerage joint venture with Citigroup’s Smith Barney unit.

Institutional securities, which includes the trading and investment-banking businesses, posted a pretax profit of $1.3 billion on revenue of $5 billion. The division had reported three consecutive quarterly losses before today.

‘Biggest Opportunity’

“Our investment-banking business delivered particularly strong results,” Mack, 64, said in the statement. “Although we still have work to do in sales and trading, it offers our single biggest opportunity for growth.”

Morgan Stanley’s revenue from fixed-income trading was $2.1 billion in the quarter, which included a $600 million charge because the tightening of the bank’s credit spreads increased the value of its liabilities. Goldman Sachs’s fixed-income revenue totaled $5.99 billion in the quarter, while JPMorgan made $5 billion.

Fixed-income revenue at Morgan Stanley also included a gain of about $300 million related to the sale of a claim against a derivative counterparty that went bankrupt. A person familiar with the matter said the counterparty was Lehman Brothers.

In equities trading, Morgan Stanley’s $1.1 billion of third-quarter revenue included a $200 million charge for credit- spread tightening. The unit’s revenue compares with $2.78 billion at Goldman Sachs and $941 million at JPMorgan.

Hiring Plan

Kelleher said the firm is more than halfway through its plan to hire 400 people for its trading businesses this year. Most of the recruiting will be outside the U.S. and in areas such as foreign exchange, emerging markets and equity derivatives, Kelleher said on a conference call with analysts.

“Market stability is a necessary precondition to investing in the markets and applying capital, and we certainly seem to be getting a more stable market,” Kelleher said. “We’ve hired a lot of people this year. We expect that the benefits of that will kick in in 2010.”

Morgan Stanley is the top adviser on mergers and acquisitions announced so far this year, the first time the firm has outmatched Goldman Sachs in that category since 2000, according to data compiled by Bloomberg. Advisory revenue, which includes fees for counseling companies on takeovers, dropped 44 percent to $279 million in the quarter. Revenue from equity underwriting more than doubled to $457 million, while debt underwriting climbed 25 percent to $303 million.

Wealth Management

Global wealth management, the retail brokerage division that owns 51 percent of Morgan Stanley Smith Barney, recorded a pretax profit of $280 million on $3 billion of revenue.

Asset-management revenue rose to $698 million, resulting in a pretax loss of $356 million. Morgan Stanley agreed this week to sell its retail investment-management business, including the Van Kampen funds acquired in 1996, to Invesco Ltd. for $1.5 billion in cash and stock, giving the bank a 9.4 percent stake in Atlanta-based Invesco.

Kelleher said the pretax gain from selling the business will total about $1 billion, depending on where the share prices are when the transaction is finalized in the middle of next year.

The deal will leave Morgan Stanley’s fund unit to focus on managing hedge funds, funds of funds, real estate, private equity and infrastructure funds, as well as long-only funds managed for institutional clients.

“We think this is the right move” for Morgan Stanley, Glenn Schorr, an analyst at UBS AG in New York, wrote in a note to investors. Schorr said a focus on institutional asset management and the rest of the franchise is the “best use” of management’s time.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: October 21, 2009 16:07 EDT