Morgan Stanley climbed in New York trading as first-quarter results beat analysts’ estimates and stock- and bond-trading revenue rose more than at any other major U.S. bank.
Morgan Stanley advanced 41 cents, or 2.3 percent, to $18.07 at 4:15 p.m. in New York, the fourth-biggest increase on the 81-company Standard & Poor’s 500 Financials Index. Profit was 71 cents a share excluding accounting charges, topping the 44-cent average estimate of 17 analysts surveyed by Bloomberg.
Fixed-income trading revenue surged 34 percent, surpassing the 19 percent gain at Citigroup Inc. and Goldman Sachs Group Inc.’s drop of more than 15 percent, excluding accounting adjustments. Morgan Stanley Chief Executive Officer James Gorman has set a goal of 15 percent return on equity after lingering pressures from the financial crisis held that measure below 10 percent for five straight years. The gauge was 9.2 percent for the first quarter.
“You had very favorable tailwinds in the fixed-income markets, and so trading revenues are very strong,” Charles Peabody, an analyst at Portales Partners LLC in New York, said in an interview on Bloomberg Radio’s Bloomberg Surveillance with Tom Keene and Ken Prewitt. “The question is the sustainability.”
Including the $2 billion accounting adjustment, the firm had a net loss of $94 million, or 6 cents a share, compared with profit of $968 million, or 50 cents, a year earlier, the New York-based company said today in a statement.
Morgan Stanley’s shares are up 19 percent this year. They fell 44 percent in 2011, the biggest decline since 2008, and through yesterday were 40 percent below where they traded when Gorman took over at the beginning of 2010.
“This quarter is further evidence that Morgan Stanley has rebounded from the financial crisis of 2008,” Gorman, 53, said in the statement.
The accounting charge is known as a debt-valuation adjustment, or DVA. It stems from increases in the value of the company’s debt, under the theory it would be more expensive to buy back the securities. Morgan Stanley booked $3.4 billion of gains in the third quarter of last year as its credit spreads widened.
Revenue at Morgan Stanley climbed to $8.91 billion from $7.76 billion a year earlier, excluding accounting adjustments. Book value per share dropped to $30.74 from $31.42 at the end of 2011.
“Great trading results, OK banking and wealth-management numbers and solid expense trends all combined to produce the best quarter we’ve seen at MS in a long time,” Glenn Schorr, an analyst at Nomura Holdings Inc., wrote in a note to clients today, referring to the firm by its stock ticker.
First-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 $2.59 billion, excluding DVA. That topped estimates of $2.02 billion from Fiona Swaffield, an analyst at RBC Capital Markets, and $1.85 billion from Citigroup’s Keith Horowitz.
Fixed-income revenue was $1.94 billion in the first quarter of 2011 and $1.25 billion in the fourth quarter. Colm Kelleher, co-president of the firm’s Institutional Securities division, oversees the trading business.
Goldman Sachs’s first-quarter fixed-income revenue, excluding DVA, was $3.57 billion. Citigroup’s climbed to $4.74 billion, while JPMorgan Chase & Co. posted a 2 percent decline to $5.02 billion.
“There was balanced strength across products and across geographies; there was no one particular driver of results,” Chief Financial Officer Ruth Porat, 54, said in an interview. “When you look at each of rates, foreign exchange, corporate credit, commodities and even investment-grade securitization, they were all contributors.”
The bank benefited as the Standard & Poor’s 500 Index climbed 12 percent in the quarter and credit spreads tightened. The gains came after the European Central Bank expanded lending, Greece reached an agreement with creditors in the biggest sovereign-debt restructuring in history and the U.S. unemployment rate fell.
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue rose 6 percent from the year-earlier period to $1.83 billion, excluding DVA. That was a 44 percent increase from the fourth quarter’s $1.28 billion, and compared with $2.4 billion at Goldman Sachs and $1.42 billion at JPMorgan. David Trone, an analyst at JMP Securities LLC, had estimated revenue of $1.55 billion, while Atlantic Equities’ Richard Staite estimated $1.3 billion.
Morgan Stanley generated $851 million in first-quarter revenue from investment banking, which is overseen by Paul J. Taubman. That figure, down 16 percent from a year earlier, included $313 million from financial advisory, $172 million from equity underwriting and $366 million from debt underwriting.
Global wealth management, overseen by Greg Fleming, posted pretax income of $387 million, up from $344 million a year earlier, as revenue climbed less than 1 percent to $3.41 billion. The division’s pretax profit margin rose to 11 percent from 10 percent in the first quarter of 2011.
Gorman has set a target for that margin of more than 20 percent, and Fleming vowed to raise the margin to the “mid-teens” by the middle of next year. Total client assets rose to $1.74 trillion as the unit had $8.7 billion of fee-based net inflows.
Morgan Stanley has the option to buy a 14 percent stake in the venture from Citigroup next month, increasing its ownership to 65 percent, and can buy the business outright over the next two years. Citigroup Chief Financial Officer John Gerspach indicated this week that the bank may be willing to sell the rest of its stake to Morgan Stanley this year.
Porat declined to say whether Morgan Stanley would try to buy the rest of Citigroup’s stake this year. She said the firm only asked for approval for a 14 percent purchase from the Federal Reserve earlier this year.
Asset management reported a pretax gain of $128 million, up from $125 million in the previous year’s period.
Compensation and benefits increased 3 percent from the year-earlier quarter to $4.43 billion, or 64 percent of the firm’s total revenue. The ratio was higher than in the first quarter of 2011, when the bank set aside 57 percent of revenue. Excluding DVA, the ratio fell to 50 percent from 55 percent.
The results included a $138 million severance charge as the firm followed through on a plan announced in December to cut 1,600 jobs in response to the weak investment-banking and trading environment.
Profit fell 13 percent last year to $4.11 billion. Return on equity was 4 percent for the year as the firm took charges to eliminate swap contracts purchased from MBIA Inc. and to convert Mitsubishi UFJ Financial Group Inc.’s preferred stake to common shares.
Morgan Stanley faces a potential three-level downgrade of its credit rating from Moody’s Investors Service, which will take ratings actions on the largest global investment banks by the end of June. That would be the largest cut among U.S. banks and may force the firm to post more collateral on derivatives trades and pay more to borrow. Porat said today that the firm has taken steps to ensure that any downgrade would be manageable.
Morgan Stanley was the top-ranked adviser on announced mergers in the first quarter and the No. 1 equity underwriter, according to data compiled by Bloomberg. Facebook Inc., the world’s largest social-networking service, said in February that it picked Morgan Stanley to lead its initial public offering, boosting the investment bank’s bid to claim first place in the IPO league table for a third straight year.