Morgan Stanley Tops Estimates as Fixed-Income Revenue Jumps

  • Highest return on equity in two years reaches Gorman’s target
  • Results contrast with rare earnings miss by Goldman Sachs

Morgan Stanley Bond Traders Top Goldman

Morgan Stanley posted Wall Street’s biggest increase in bond-trading revenue as a turnaround in that business accelerated, pushing return on equity to the highest in two years.

Fixed-income revenue almost doubled to $1.71 billion, the New York-based company said Wednesday in a statement, a surge that dwarfed gains Goldman Sachs Group Inc. reported Tuesday. In equities trading, where Morgan Stanley is Wall Street’s leading shop by revenue, revenue declined 1.9 percent to $2.02 billion, compared with the $1.92 billion estimate.

“We reported one of our strongest quarters in recent years,” Chief Executive Officer James Gorman said in the statement. “All our businesses performed well in improved market conditions. We are confident in our business model and the opportunities ahead, while recognizing that the environment remains uncertain.”

The results marked the fourth straight quarter Morgan Stanley posted bond-trading revenue above $1 billion after Gorman said the business could produce at least $4 billion annually. The fixed-income division -- crucial to the CEO’s plan to improve companywide returns -- was overhauled in late 2015 after revenue plunged to $550 million in that year’s final quarter. Trading chief Ted Pick cut about 25 percent of the division’s staff and assigned equities executive Sam Kellie-Smith to turn around the business.

Morgan Stanley’s fixed-income business benefited from strength in rates trading because of “variability around interest-rate expectations” and credit trading that was fueled by tightening spreads, Chief Financial Officer Jonathan Pruzan said in a telephone interview.

The results followed a surprise miss by Goldman Sachs on Tuesday, when that firm said revenue from fixed-income trading suffered from weaker demand in commodities, currencies and credit. Goldman’s $1.69 billion in revenue missed analysts’ $2.03 billion estimate. Bank of America Corp., by contrast, posted stronger trading revenue that helped fuel a 40 percent surge in first-quarter profit. JPMorgan Chase & Co. and Citigroup Inc. last week also reported higher fixed-income trading revenue.

Profit Surge

Morgan Stanley’s net income climbed 70 percent to $1.93 billion, or $1 a share, from $1.13 billion, or 55 cents, a year earlier, the company said in the statement. Profit surpassed the 90-cent average estimate of 20 analysts surveyed by Bloomberg.

Morgan Stanley shares rose 2 percent to $42.03 in early trading at 8:34 a.m. in New York. The stock had dropped 2.5 percent this year through Tuesday, trailing the 0.8 percent decline for the 65-company S&P 500 Financials Index.

Return on equity, a gauge of profitability, rose to 10.7 percent from 8.7 percent in the previous quarter and 6.2 percent a year earlier. Analysts had expected 9.75 percent, and Gorman has targeted 9 percent to 11 percent for 2017.

Momentum in markets at the start of the year related to the U.S. election may be showing signs of slowing, Pruzan said, citing “political uncertainty in the U.S. around policy initiatives, as well as geopolitical risks like what we saw in Syria and North Korea” and the French elections.

“There’s a lot out there that causes people to pause, and clearly uncertainty generally doesn’t bode well for activity levels,” Pruzan said.

Morgan Stanley’s companywide revenue rose 25 percent to $9.75 billion, compared with the $9.29 billion average estimate of analysts. Non-interest expenses climbed 15 percent to $6.94 billion, above the $6.69 billion estimate as revenue climbed faster than analysts predicted. The firm said at the start of 2016 it would trim $1 billion in annual expenses by this year.

Compensation, the firm’s biggest expense, increased 21 percent to $4.47 billion, compared with the $4.2 billion estimate.

Wealth-management revenue rose 11 percent to $4.06 billion, compared with the $4.17 billion estimate of Devin Ryan of JMP Securities LLC. Investment-banking advisory revenue increased 43 percent to $1.42 billion from a year earlier. That surpassed analysts’ $1.18 billion estimate.

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