Morgan Stanley's Earnings Rise on Strength in Wealth Management -- 3rd Update

By Liz Hoffman Features Dow Jones Newswires

Morgan Stanley chief James Gorman's outsize bet on wealth management is paying off in a big way.

Continue Reading Below

The firm's army of brokers -- many of them far from Wall Street, scattered at 600 offices from Eugene, Ore., to Alpharetta, Ga.--more than compensated for a continued slowdown in trading and set Morgan Stanley on track for its most profitable year in a decade.

Morgan Stanley's $5.5 billion in net income for the first nine months of the year is its best showing since 2007. In the third quarter, the firm posted earnings of 93 cents a share and revenue of $9.2 billion, which were both higher than a year ago and easily beat analyst expectations.

Morgan Stanley, along with Goldman Sachs Group Inc., rounded out big banks' quarterly earnings Tuesday. The five biggest Wall Street firms all improved from a year earlier, each relying on a different cocktail to overcome continued torpor in the once-lucrative securities business. J.P. Morgan Chase & Co. and Citigroup Inc. leaned on commercial lending and credit cards. Bank of America Corp. was aided by lending and expense discipline, while investment gains and merger fees helped Goldman.

Morgan Stanley's engine is increasingly is its wealth-management business, which oversees $2.3 trillion for 3.5 million Americans and continues to rake in assets. It is the centerpiece of Mr. Gorman's effort to turn Morgan Stanley from Wall Street's problem child to a steadier firm prized by investors, largely by focusing on wealth and asset management.

Those businesses are ascendant on Wall Street. Baby boomers have hit their peak earning years and are managing for retirement, while the number of millionaires looking for advice and concierge services is growing. Meanwhile, postcrisis rules and quiet markets have shackled trading desks and raised the cost of the capital they need to operate.

Continue Reading Below

The boom in wealth management extends beyond Wall Street. Regional brokerage Edward Jones recently passed the $1 trillion mark in total client assets.

At Morgan Stanley, the firm's multiyear purchase of Citigroup Inc.'s brokerage, Smith Barney, is now fully integrated, and executives have squeezed much of the obvious savings from the business. Quarterly revenues of $4.2 billion and a profit margin of 26.5% in the quarter were both records.

"The obvious low-hanging fruit is off the table," Mr. Gorman said Tuesday. "But these businesses are scale businesses," so profitability should improve as account balances grow.

A key initiative is pushing mortgages and other loans to wealth-management clients, which hit a record $76 billion at the end of the quarter. Another is adding digital offerings -- Morgan Stanley is rolling out a robo adviser for smaller account balances -- hopefully without losing the loyalty of its 15,800 human brokers.

The old model of charging clients commissions to buy and sell stocks is falling away, with Morgan Stanley and rivals embracing a model where advisers charge a flat fee to manage portfolios.

Morgan Stanley's assets in this type of account topped $1 trillion for the first time last quarter, up from $855 billion a year ago. Bank of America Corp., which encompasses the giant brokerage Merrill Lynch, also surpassed $1 trillion in fee-based assets in the quarter, up from $871 billion a year ago.

These accounts face fewer regulations and appear to better align brokers' incentives with those of clients. And because they don't rely on clients to buy and sell stocks and bonds to generate fees, they are more resilient in calm markets, when trading appetite falls. They are also less vulnerable to the shift from actively managed portfolios to passive approaches.

Like Morgan Stanley, Bank of America's wealth division also had a strong quarter. Its business posted a pretax profit margin of 27%.

Morgan Stanley's return on equity, a key measure of how profitably it invests shareholders' money, stood at 9.6% in the quarter and 9.8% through the first nine months of the year. Mr. Gorman has targeted a minimum of 9% for the full year.

Trading revenue fell 8%, mirroring declines at rivals as fewer idiosyncratic events such as Brexit or central-bank moves did little to spark client activity.

"We saw the same issues that most others did," Chief Financial Officer Jonathan Pruzan said.

Revenue from stock-trading was flat at $1.9 billion. As Wall Street's leader in that business, with a 30% share of fees, Morgan Stanley has little room to grow. But guarding its turf remains a priority for Edward Pick, the former equities chief who now runs the firm's overall trading operation.

Morgan Stanley's smaller fixed-income division, which trades bonds, commodities and other products, reported $1.2 billion in revenue, down 21% from year ago but still clearing a $1 billion quarterly target set out by Mr. Gorman a year ago. Interest-rates and currencies trading was particularly slower, Mr. Pruzan said.

Fixed-income trading was down 27% at J.P. Morgan and 26% at Goldman Sachs.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

October 17, 2017 17:26 ET (21:26 GMT)