By Lauren Tara LaCapra

Morgan Stanley <MS.N> reported a third-quarter profit and its trading and merger advisory businesses performed better than competitors'.

The bank benefited from a $3.4 billion accounting gain, and its underlying businesses looked strong enough for investors to send its shares up 1.3 percent in premarket trading.

Morgan Stanley's results also reflected cost cuts, a more profitable wealth management business, and what top executives characterized as market-share gains with trading clients.

In an interview, Chief Financial Officer Ruth Porat said the No. 2 U.S. investment bank does not try to hedge its debt valuation adjustment, which accounted for the big accounting gain.

"When you look at credit spreads or CDS and it's inconsistent with the strength we're seeing in our business ... of course it's frustrating," said Porat.

The bank's bonds weakened significantly against U.S. Treasuries during the quarter as investors worried about its exposure to troubled European countries and banks. This allowed the bank to record an accounting gain because it could theoretically profit from buying back debt.

In its earnings report, Morgan Stanley said its gross exposure to Greece, Ireland, Italy, Spain and Portugal was $5.69 billion at September 30, or $2.1 billion including hedges, while the bank's equity, a measure of its net worth as a company, was about $60 billion.

The bank said Its exposure to France at September 30 was $1.53 billion, or a negative $286 million including hedges. A report on the financial blog Zero Hedge on September 22 pegged the bank's exposure to France at $39 billion at the end of 2010, which sparked fears about losses it might incur.

Morgan Stanley reported third-quarter earnings of $2.15 billion, or $1.15 per share, compared with a loss of 7 cents per share a year earlier. Revenue climbed 46 percent to $9.89 billion.

Excluding the DVA gain, it earned 2 cents per share.

Revenue from its trading business more than doubled from a year earlier and climbed 24 percent from the second quarter. The sharp increases reflect the DVA gain.

Its wealth management group reported $3.26 billion in revenue, up 5 percent from a year ago but down from the second quarter.

Asset management revenue of $215 million fell 73 percent from the year-ago period and 67 percent from the second quarter due to paper losses on principal investments in its merchant banking and real estate investing business.

(Reporting by Lauren Tara LaCapra in New York; editing by John Wallace and Dan Wilchins)