Morgan Stanley (MS) reported a stronger-than-expected second-quarter profit as its bond and equities trading businesses handily outperformed those of its Wall Street rivals.
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The results capped a robust quarter for big U.S. banks - Goldman Sachs Group Inc (GS) excepted - although many relied more on cost cuts and lower legal expenses than Morgan Stanley, which achieved strong results in most of its businesses.
"Overall it has been a pretty good quarter for the universal banks. They continue to show expense discipline and revenue are going to hang in there better than many expected," Sandler O'Neill analyst Jeffery Harte said.
Morgan Stanley CEO James Gorman has been focusing on equities trading and wealth management as profit drivers for the sixth-largest U.S. bank by assets as stricter regulations and capital requirements make its more difficult to trade bonds.
On an adjusted basis, revenue from the bank's equities trading business jumped 27 percent to $2.27 billion, beating arch rival Goldman Sachs, which reported revenue of $2 billion. Goldman had come out on top in the two preceding quarters.
Revenue from trading fixed-income, currency and commodities increased 25 percent to $1.27 billion on an adjusted basis.
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Fixed-income trading dragged on the earnings of other big Wall Street banks during the quarter as concerns ranging from the Greek debt crisis to the timing of a long-awaited U.S. interest rate hike kept traders on the sidelines.
Morgan Stanley's institutional securities business - which includes both bond and equity trading - accounted for 52.2 percent of overall revenue in the three months ended June 30, up from 49 percent a year earlier.
Revenue from equities trading accounted for about 24 percent of total adjusted revenue in the latest quarter, while bond trading accounted for about 13 percent.
In 2006, bond trading accounted for more than 28 percent of revenue while equities trading accounted for about 19 percent.
Shares of Morgan Stanley were up 1.2 percent in premarket trading following what Nomura Securities International analyst Steven Chubak described as "an impressive set" of results.
WEALTH MANAGEMENT MARGIN RISES
The bank's wealth management business achieved a pretax margin of 23 percent, up from 22 percent in the first quarter and 21 percent in the year-earlier quarter. Gorman has set a target of 22-25 percent for the business this year.
Adjusted net revenue rose 12.2 percent to $9.56 billion, with wealth management net revenue increasing 4.7 percent to $3.88 billion.
Morgan Stanley said its net income from continuing operations applicable to the company fell to $1.67 billion, or 85 cents per share, from $1.82 billion, or 92 cents per share, a year earlier.
On an adjusted basis, the bank earned 79 cents per share - exceeding the average analyst estimate by 5 cents, according to Thomson Reuters I/B/E/S.
Still, the bank's adjusted average return-on-equity of 9.1 percent remained below the 10 percent minimum set by Gorman.
The bank's revenue from investment banking, which includes advising on takeovers and underwriting equity and bond issues, fell 1 percent to $1.61 billion.
Morgan Stanley ranked second globally after Goldman Sachs in advising on deals in the first half of 2015, according to Thomson Reuters data.
The five big Wall Street banks - excluding Wells Fargo Corp <WFC.N>, which does not have a large investment banking business - reported total net earnings of $24.1 billion in the quarter, up $6.7 billion from the same quarter last year.
(Additional reporting by Olivia Oran and Sudarshan Varadhan; Editing by Ted Kerr)