Morgan Stanley Tops Estimates on Stock Trading, Brokerage

Morgan Stanley Headquarters
Pedestrians walk outside Morgan Stanley headquarters in New York. Photographer: Victor J. Blue/Bloomberg

Morgan Stanley reported earnings that beat analysts’ estimates as equity-trading revenue jumped the most among the biggest Wall Street firms and profitability at the brokerage unit, the world’s biggest, increased.

Third-quarter net income was $906 million, or 45 cents a share, compared with a loss of $1.02 billion, or 55 cents, a year earlier, the New York-based company said today in a statement. Excluding an accounting charge tied to the firm’s own debt, profit was 50 cents a share, topping the 40-cent average estimate of 24 analysts surveyed by Bloomberg.

Chief Executive Officer James Gorman, 55, has made Morgan Stanley more reliant on wealth-management revenue while decreasing the amount of capital allocated to fixed-income trading, which last quarter generated the least revenue among the firm’s peers. Stock trading and Morgan Stanley’s retail brokerage both benefited from an 18 percent rise in the Standard & Poor’s 500 Index in the first nine months of 2013.

“Morgan Stanley showed particular strength versus peers in equity trading,” Matthew Burnell, a Wells Fargo & Co. analyst, wrote today in a note to clients. “We anticipate Morgan Stanley will outperform peers on its stronger-than-expected third-quarter results despite returns stuck in the mid-single digits.”

Morgan Stanley rose 2.4 percent to $29.62 at 12:14 p.m., after climbing as high as $29.97, which marked the first time in more than two years that the shares surpassed their price when Gorman took over. The gain was the biggest on the 81-company Standard & Poor’s 500 Financials Index.

Book Value

Revenue excluding accounting adjustments rose to $8.1 billion from $7.5 billion a year earlier. Book value per share climbed to $32.13 from $31.48 at the end of June. The firm’s return on equity, a measure of how well it reinvests earnings, was 6.4 percent excluding accounting adjustments, up from 3.4 percent a year earlier.

“Despite a challenging quarter for markets, our results demonstrated the consistency and durability of our business model,” Gorman said on a conference call with analysts. “We stayed very close to home in regards to risk in the third quarter due to the illiquid markets.”

Gorman said in May that Morgan Stanley can post a 10 percent return on equity by next year if regulators allow it to return a “reasonable” amount of capital to shareholders. ROE was 6 percent in the first half, and the bank announced a $500 million stock buyback in July. It repurchased $123 million in the third quarter.

Accounting Charge

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 it back. The firm had a $171 million charge from DVA, versus a $2.26 billion charge in the third quarter of 2012.

Morgan Stanley had a $73 million tax benefit related to repatriating earnings from outside the U.S. The firm also had a gain from selling an investment in an insurance broker.

In equities trading, led by Ted Pick, Morgan Stanley’s revenue climbed 39 percent from a year earlier to $1.71 billion, excluding DVA. That compared with $970 million at Bank of America Corp. and $1.64 billion at Goldman Sachs Group Inc. JPMorgan Chase & Co.’s Kian Abouhossein had estimated equities revenue of about $1.44 billion, while Credit Suisse Group AG’s Howard Chen estimated $1.6 billion.

Wealth Management

Pretax profit from global wealth management, overseen by Greg Fleming, almost tripled to $668 million as revenue climbed to $3.48 billion. The division’s pretax profit margin rose to 19 percent from 13 percent in the third quarter of 2012.

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 in June. The unit can achieve a 20 percent to 22 percent margin absent any changes in the broader markets, Gorman said.

Third-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 $835 million, excluding DVA. That compared with estimates of $975 million from JPMorgan’s Abouhossein and $1 billion from Credit Suisse’s Chen.

Fixed-income revenue fell 43 percent from $1.46 billion in the year-earlier quarter. This year’s figure compared with $1.29 billion at Goldman Sachs and $2.78 billion at Citigroup Inc.

ROE Focus

“We have a flight path to an ROE in excess of cost of capital” in the fixed-income unit, Chief Financial Officer Ruth Porat said on the conference call. “If there’s one metric to stay focused on, it’s the ROE. That’s the way we’re managing the business.”

Morgan Stanley’s physical commodities business, which includes electricity plants and an oil-transportation company, is facing a regulatory review. The Fed is examining all legal and regulatory exemptions that allow banks to participate in the commodities markets, a person briefed on the process said last month.

The firm held talks last year with Qatar’s sovereign-wealth fund about selling a stake in its commodities division, and Gorman has said he would change the structure of the business if he found an appropriate deal. The unit cut jobs and shut businesses including agricultural products and dry freight this year.

Investment Banking

Investment banking, led by Mark Eichorn and Franck Petitgas, generated $992 million in third-quarter revenue. That figure, up 2 percent from a year earlier, included $275 million from financial advisory, $236 million from equity underwriting and $481 million from debt underwriting.

Morgan Stanley was the third-ranked underwriter of global equity, equity-linked and rights offerings in the first nine months of the year, according to data compiled by Bloomberg. It was also the No. 3 adviser on global announced mergers and acquisitions, the data show.

The firm was the top underwriter of investment-grade debt in the third quarter, excluding self-led deals, for the first time since at least 1999, according to the data. It was one of the lead underwriters on Verizon Communications Inc.’s record $49 billion offering last month.

Asset management reported a pretax gain of $300 million, compared with $198 million in the previous year’s period.

Goldman Sachs

Goldman Sachs posted earnings yesterday that were little changed from a year earlier and fixed-income trading revenue that was the lowest since the financial crisis. Citigroup reported third-quarter profit on Oct. 15 that missed analysts’ estimates as fixed-income trading slumped 26 percent. Both banks are based in New York.

Gorman is hoping to show progress toward his goal of boosting returns even without an improvement in markets. He completed the purchase of the firm’s brokerage joint venture in June and the bank is ahead of his targets for shrinking the capital allocated to fixed-income trading.

Porat, 55, said last month that the firm intends to accelerate lending as it receives $57 billion in deposits from Citigroup as part of its Smith Barney purchase. The bank is targeting a 70 percent loan to deposit ratio in 2015, driven by growth in products such as mortgages and corporate lending, up from 55 percent last year.


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