Morgan Stanley Shares Surge Most in Two Years

Morgan Stanley rose the most in more than two years in New York trading after reporting a second- quarter loss that was smaller than analysts estimated and the only gain in trading revenue among major U.S. banks.

Morgan Stanley climbed as much as 9.1 percent after posting a net loss of 38 cents a share, smaller than the 61-cent average estimate of 18 analysts surveyed by Bloomberg. A $1.7 billion charge tied to the conversion of Mitsubishi UFJ Financial Group Inc.’s preferred stake in the New York-based firm caused the loss, which compared with profit of $1.09 a year earlier.

Trading revenue rose 14 percent from the first quarter, while Goldman Sachs Group Inc. posted a 47 percent drop earlier this week. The results may help Morgan Stanley (MS) Chief Executive Officer James Gorman, 53, convince investors the firm can reach his goals of increasing profitability and gaining market share in trading. The firm’s shares are trading below book value, and this week touched the lowest level since March 2009.

“So far as confidence in management and their ability to deliver, delivering good fixed-income results is not only a good bottom line victory, but from a symbolic standpoint it goes a ways toward calming investor fears,” Jeffery Harte, an analyst at Sandler O’Neill & Partners, said today in an interview with Bloomberg Television.

The shares climbed $1.91, or 8.8 percent, to $23.63 at 11:42 a.m. in New York Stock Exchange composite trading, the biggest jump since May 1, 2009, and the third-largest gain in the Standard & Poor’s 500 Index.

‘Very Impressive’

“Morgan Stanley really knocked the ball out of the park,” Jason Tyler, senior vice president at Ariel Investments LLC, said today in an interview with Tom Keene on Bloomberg Radio. “This is a very impressive quarter from a revenue standpoint.”

The stock was down 20 percent this year through yesterday, after falling 8.1 percent in 2010. That made it the fourth-worst performer in the 81-company Standard & Poor’s 500 Financials Index since Gorman took over at the beginning of 2010.

Mitsubishi UFJ last month converted $7.8 billion of outstanding convertible preferred stock in Morgan Stanley into common stock. The move provides Mitsubishi UFJ with a 22 percent ownership interest in the U.S. investment bank and a second seat on its board.

Morgan Stanley agreed in April to increase the number of common shares Mitsubishi UFJ will receive by 75 million to speed up the conversion and eliminate $784 million in annual dividend payments.

Fixed-Income Goal

Revenue at Morgan Stanley climbed to $9.28 billion from $7.96 billion a year earlier, the highest since the end of the financial crisis. Book value per share fell to $30.17 from $31.45 at the end of March. Net income was $1.19 billion, versus $1.96 billion in the same period of 2010.

“While global markets remained challenging this quarter, the firm delivered higher year-over-year revenues across our three major business segments,” Gorman said in the statement.

In the second quarter, revenue from fixed-income sales and trading, which is run by Ken deRegt along with commodity trading co-heads Colin Bryce and Simon Greenshields, was $2.09 billion. That compared with $1.77 billion in the first quarter and $2.33 billion in the second quarter of 2010.

Excluding gains or losses from its own credit spreads, fixed-income revenue was $1.9 billion, higher than estimates of $1.5 billion from Richard Staite at Atlantic Equities LLP and $1.57 billion from Keith Horowitz at Citigroup Inc. Fixed-income trading revenue was $4.28 billion at JPMorgan Chase & Co. (JPM), $3.03 billion at Citigroup and $1.6 billion at Goldman Sachs.

Bond Insurers

Fixed-income trading benefited from $471 million of gains in the second quarter attributed to hedges against exposure to bond insurers, Chief Financial Officer Ruth Porat said on a conference call today.

Morgan Stanley reported $318 million in losses in the first quarter and more than $1 billion in total losses since the start of 2010 related to the monoline insurers. The hedges were adjusted in the second quarter and otherwise would have resulted in more losses, Porat said.

Commodity trading revenue declined “meaningfully” in the quarter as client volume decreased, Porat said. That decline served to “really mask the relative progress” in the other fixed-income trading units in “difficult” markets, she said. The firm’s daily average value-at-risk, a measure of how much it could lose in the markets, rose to $145 million from $121 million in the first quarter.

Gorman’s Goal

Gorman in February laid out a goal of increasing fixed- income revenue market share by 2 percentage points, with Colm Kelleher, co-head of the firm’s investment bank, leading the effort. The firm had a market share based on revenue of about 6.5 percent among the top nine U.S. and European investment banks last year, up from about 5.5 percent in 2009, according to an April report by Glenn Schorr, a Nomura Holdings Inc. analyst.

“The reason we’ve set a 2 percent market share goal and think that’s a reasonable first goal to set for ourselves is that market share is relatively low for this franchise,” Porat said today in an interview. “We’re regaining a share which would be a logical share on this platform, and I think that context is important. It gives us a little bit of a tailwind, even in a tougher market.”

Goldman Sachs declined 0.7 percent on July 19 in New York trading after fixed-income trading revenue fell 63 percent from the first quarter. JPMorgan exceeded estimates last week as it posted trading revenue that topped all other major U.S. banks by more than $1.5 billion. Both companies are based in New York.

Equities Trading

In equities trading, headed by Ted Pick, Morgan Stanley’s second-quarter revenue rose to $1.85 billion, from $1.70 billion in the first quarter and up 31 percent from a year earlier. The unit’s revenue compares with $1.92 billion at Goldman Sachs and $1.22 billion at JPMorgan.

Morgan Stanley generated $1.47 billion in second-quarter revenue from investment banking, which is overseen by Paul J. Taubman. That figure, up 66 percent from a year earlier, included $533 million from financial advisory, $419 million from equity underwriting and $521 million from debt underwriting.

Global wealth management, led by Greg Fleming, posted pretax income of $322 million, up from $207 million in the second quarter of 2010. The division’s pretax profit margin fell to 9 percent from 10 percent in the first quarter. Gorman has said the unit should eventually post a pretax profit margin of more than 20 percent.

Improve ‘Soon’

“Margins must improve and do so soon,” Gorman said on the call. Fleming and Chief Operating Officer Jim Rosenthal are analyzing “what else we really need to do to get ourselves faster to the finish line. So we are taking an aggressive relook at the back end of some of the integration steps,” he said.

Asset management reported a pretax gain of $165 million, compared with a loss of $86 million in the previous year’s period.

Morgan Stanley’s Tier 1 common ratio was about 14.6 percent under Basel 1 and between 6.5 percent and 7 percent under Basel III rules, Porat said on the conference call today. The firm expects its required buffer from being a systemically important financial institution to be 2 percent and plans to run closer to the 9 percent level sooner than required, she said.

Compensation and benefits increased 20 percent from the year-earlier quarter to $4.68 billion, or 50 percent of the firm’s overall revenue. The ratio was higher than in the second quarter of 2010, when the bank set aside 49 percent of revenue.

China Venture

Morgan Stanley’s expenses included a $130 million charge tied to a joint venture in China with Huaxin Securities Co. that began operations in June. Morgan Stanley established the venture after selling its 34.3 percent stake in China International Capital Corp. last year.

Morgan Stanley was the second-ranked adviser on mergers announced in the first half of this year, as well as the third- ranked underwriter of stock offerings, according to data compiled by Bloomberg. The firm finished 2010 as both the top underwriter of equity offerings and the top adviser on announced mergers and acquisitions globally for the first time since Bloomberg began compiling data in 1999.

Morgan Stanley bought a controlling stake in a joint venture with Citigroup’s Smith Barney unit in 2009, giving it a retail brokerage with 17,638 advisers and $1.71 trillion in client assets as of June 30.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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