Morgan Stanley climbed to the highest price in more than two years after second-quarter earnings beat estimates and the firm said it will buy back $500 million in stock.
The shares rose 4.4 percent to $27.70 at 4:15 p.m. in New York. While that’s the highest since April 2011, it’s still below the $29.60 price at the end of 2009, when Chief Executive Officer James Gorman took over.
Record brokerage revenue and an 18.5 percent pretax margin show progress toward the higher profitability targets Gorman laid out for the unit when Morgan Stanley bought the remaining stake in the venture last month. The firm also posted the highest equity-trading revenue among its peers for the first time in at least two years.
“The revenue beat was pretty much across the board, with investment banking, trading and commissions all doing a bit better than expected,” Chris Kotowski, an Oppenheimer & Co. analyst who expects the stock to perform in line with the Standard & Poor’s 500 Index over the next 12 to 18 months, wrote today in a report.
The firm said it will start buying back stock after receiving no objections from the Federal Reserve. Chief Financial Officer Ruth Porat, 55, said in an interview that Morgan Stanley sought regulatory approval for the buyback after it completed the brokerage purchase at the end of June.
Net income rose 66 percent to $980 million, or 41 cents a share, from $591 million, or 29 cents, a year earlier, on higher stock-trading revenue and wealth-management profit margins that reached an all-time high. Excluding accounting gains tied to the firm’s own debt and a charge related to buying the brokerage, profit was 45 cents a share, topping the 43-cent average estimate of 26 analysts surveyed by Bloomberg.
Gorman, 55, said in May that his firm can post a 10 percent return on equity, double that of 2012, by next year if regulators allow it to return a “reasonable” amount of capital to shareholders. ROE was 4.4 percent in the second quarter, down from 8 percent in the first quarter.
“We do see the update on the share buyback as a positive,” Fiona Swaffield, an analyst at Royal Bank of Canada who has a “market perform” rating on the stock, wrote today in a note to investors. “While small, it is a positive step especially given some concerns over the impact of the new proposals on the supplementary leverage ratio.”
Morgan Stanley’s second-quarter supplementary leverage ratio was 4.2 percent, below U.S. regulators’ proposed 5 percent minimum for holding companies, Porat said on a conference call with analysts today. The deposit-taking unit exceeded the 6 percent requirement for bank subsidiaries, she added. She said the firm expects to meet the minimums by 2015.
The U.S. plan goes beyond the 3 percent global minimum requirement that the Basel Committee on Banking Supervision approved to help prevent a repeat of the 2008 financial crisis.
Revenue excluding accounting adjustments rose 26 percent to $8.33 billion. Book value per share increased to $31.48 from $31.21 at the end of March.
The accounting gain is known as a debt valuation adjustment, or DVA. It stems from decreases in the value of the company’s debt, under the theory it would be less expensive to buy it back. The firm had a $175 million gain from DVA, versus a $350 million benefit in the second quarter of 2012.
Pretax profit from global wealth management, overseen by Greg Fleming, 50, jumped 60 percent to $655 million as revenue climbed to $3.53 billion. The division’s pretax profit margin rose to 18.5 percent, a record since the joint venture was established in 2009, from 13 percent a year earlier.
Gorman said he was encouraged when Bank of America Corp. reported a pretax profit margin for its Merrill Lynch brokerage of 27.6 percent.
“It’s great news, because it’s proof-positive that doubling up in this space was a smart thing to do,” Gorman said in an interview with Erik Schatzker on Bloomberg Television. “I always like to see somebody out there who’s setting a higher bar as a demonstration of what can be done.”
The wealth-management unit can earn a pretax margin of more than 23 percent by 2015 as interest rates and stock markets climb, Gorman said last month. A 20 percent to 22 percent margin is possible absent any changes in the broader markets, he said.
Retail investors have been slow to shift back into stocks, and remain cautious, Gorman said.
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue increased 58 percent from a year earlier to $1.81 billion, excluding DVA. That compared with $1.19 billion at Bank of America and $1.77 billion at Goldman Sachs Group Inc., excluding revenue from Goldman Sachs’s reinsurance business.
Keith Horowitz, an analyst at Citigroup, had estimated equities revenue of $1.4 billion, while Barclays Plc’s Roger Freeman estimated $1.5 billion.
Second-quarter revenue from fixed-income sales and trading, run by Michael Heaney and Rob Rooney with commodity trading co-heads Colin Bryce and Simon Greenshields, was $1.15 billion, excluding DVA. That compared with estimates of $1.2 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.3 billion from Freeman at Barclays.
Fixed-income revenue rose 50 percent from $770 million in the year-earlier quarter, trailing $2.46 billion reported by Goldman Sachs and $3.37 billion at Citigroup.
“We reduced risk in May given concerns about the potential market volatility within fixed-income products,” Porat said. “Our view is that sets us up well going forward to support higher client activity.”
Morgan Stanley’s jump in fixed-income revenue came as it navigated markets that rival banks described as challenging. Long-term interest rates rose and risk premiums on debt widened in June after Fed Chairman Ben S. Bernanke indicated the central bank might taper its $85 billion in monthly bond purchases, which have boosted demand for higher-yielding assets.
The increase marks a rebound from last year’s second quarter, when the firm posted its lowest fixed-income revenue in more than two years. The company has said the underperformance was caused in part by clients halting some trading amid a Moody’s Investors Service review of its credit rating that quarter, which resulted in a downgrade.
Heaney and Rooney were named to oversee the fixed-income business in May after Ken deRegt left to join investment firm Canarsie Capital Group. Gorman laid out a plan in June to boost returns in fixed-income trading above the company’s cost of equity after four of the five units failed to meet that metric last year.
Part of that plan may be a change to the commodities business. The firm is cutting 10 percent of its workforce in commodities, a person briefed on the matter said last month. Gorman said in today’s interview that he’s open to different structures in the commodities business.
“We have no compulsion to act rashly,” he said.
Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.08 billion in second-quarter revenue. That figure, up 22 percent from a year earlier, included $333 million from financial advisory, $327 million from equity underwriting and $418 million from debt underwriting.
Morgan Stanley was the second-ranked underwriter of global equity, equity-linked and rights offerings in the first half, behind Goldman Sachs, according to data compiled by Bloomberg. It was the No. 3 adviser on global announced mergers and acquisitions and the seventh-ranked underwriter of U.S. bonds, the data show.
Asset management reported a pretax profit of $160 million, compared with $43 million in the previous year’s period.