Morgan Stanley Sees Better Trading Environment in 2017

  • Gains fueled by post-election rates and currencies trading
  • Fourth-quarter profit, trading revenue surpass estimates

Morgan Stanley Bond-Trading Revenue Surges in 4Q

Morgan Stanley said momentum from a strong fourth quarter, including bond-trading revenue that more than doubled, continued into the first weeks of this year.

“Going into 2017, the market sentiment is clearly more optimistic than we were going into 2016,” Chief Financial Officer Jonathan Pruzan said Tuesday in an interview. “The tone is better, all the markets are open and constructive, which is not where we were last year. So from a sales and trading perspective, we continue to see good levels of activity.”

Bond-trading revenue in the last three months of 2016 surged 167 percent to $1.47 billion, helping the firm post its biggest fourth-quarter profit since the financial crisis. The bond haul exceeded analysts’ expectations by almost $500 million and was the largest increase among U.S. banks that have reported results so far. Strength came from currencies and government-bond trading after the U.S. election upended expectations for interest rates, economic growth and tax policy, Pruzan said. This month, clients are repositioning portfolios and putting new cash to work, he said.

Some bank executives who began to gather Tuesday at the World Economic Forum in Davos, Switzerland, also said they see a rosy 2017 for their businesses.

“The expectation is that fixed income is going to do well,” Credit Suisse Group AG Chief Executive Officer Tidjane Thiam said in an interview with Bloomberg Television. UBS Group AG Chairman Axel Weber said he’s “quite optimistic” about the year ahead.

Equity trading at Morgan Stanley climbed 7.3 percent to $1.95 billion, compared with the estimate of $1.84 billion. For the year, equity-trading revenue fell 3 percent. The company is cutting its global bonus pool for the division by as much as 4 percent and dismissing some employees, people familiar with the plans said earlier this month. Ted Pick has overseen trading at Morgan Stanley since late 2015, and he installed Sam Kellie-Smith as head of bond trading and Peter Santoro to run stock trading.

The trading rebound contributed to a companywide 83 percent increase in fourth-quarter profit. Net income climbed to $1.67 billion, or 81 cents a share, from $908 million, or 39 cents, a year earlier, the New York-based company said in a statement. The 2015 figure includes a 4-cent accounting charge that’s since been discontinued. The results beat the 65-cent average estimate of 21 analysts in a Bloomberg survey.

Gorman’s Strategy

Chief Executive Officer James Gorman, 58, has pledged to improve returns by cutting costs and making bond-trading earnings more predictable after that business weighed on profitability in previous quarters. Gorman said in June that fixed income and commodities could generate $4 billion in annual revenue even after his decision to cut 25 percent of the division’s staff in late 2015.

Morgan Stanley fell 2.3 percent to $42.82 at 10:11 a.m., reversing an earlier gain, as bank shares declined and bonds and gold advanced after U.S. President-elect Donald Trump called the dollar “too strong.” Morgan Stanley surged 69 percent in the 12 months through Friday.

Revenue rose 17 percent to $9.02 billion, beating the $8.48 billion average estimate. Noninterest costs increased 8 percent to $6.78 billion, above analysts’ $6.37 billion estimate. Compensation, the firm’s biggest expense, climbed 12 percent to $4.08 billion on higher trading revenue. Analysts estimated $3.86 billion.

Annualized return on equity, a gauge of profitability, was 8.7 percent. The firm’s target is 9 percent to 11 percent by the end of 2017.

Wealth-management revenue climbed 3 percent to a record $3.99 billion, as profit jumped 16 percent to $891 million.

Investment-banking revenue rose 5 percent to $1.38 billion from a year earlier on higher levels of completed mergers and issuance of non-investment-grade debt. The business is part of the institutional securities group, which posted a 35 percent increase in revenue on the trading gains.

Bond-trading revenue also helped JPMorgan Chase & Co., the biggest U.S. bank. It said last week that fourth-quarter profit rose 24 percent on fixed-income gains. Bank of America Corp., No. 2 by assets, posted a 43 percent jump in profit as revenue from bond trading climbed 12 percent. Wells Fargo & Co.’s net income increased to $12.4 billion from $11.6 billion a year earlier.

Goldman Sachs Group Inc. and Citigroup Inc. are scheduled to report results Wednesday.

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