Morgan Stanley said its second-quarter profit rose to $1.76 billion as the Wall Street firm's traders delivered strong results, topping rival Goldman Sachs Group Inc. for the second straight quarter.
Shares rose 3.5% premarket as earnings and revenue beat the expectations of Wall Street analysts.
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"We feel good about the decisions we've made," Chief Financial Officer Jonathan Pruzan said in an interview. "To put up those numbers across the board, in a quarter where we saw fewer market events, less client activity, feels good."
Morgan Stanley reported earnings of 87 cents a share. Analysts had expected 76 cents, up from 75 cents a year ago. Revenue of $9.5 billion was up from $8.91 billion in the second quarter of last year, and well ahead of analyst expectations of $9.09 billion.
The bank run by Chairman and Chief Executive James Gorman is in the late stages of a multiyear turnaround that de-emphasizes volatile trading businesses in favor of more stable assets and wealth management. With the big pieces in place -- buying Citigroup Inc.'s Smith Barney brokerage, slashing risk-weighted assets, and firing hundreds of fixed-income traders -- the challenge now is to produce higher returns.
Mr. Gorman has promised a 10% return on equity by year-end. The figure stood at 9.1% in the quarter.
Morgan Stanley is the last of the large U.S. banks to report earnings for the second quarter, a three-month stretch of calm markets that did little to jolt Wall Street businesses. Big banks including Goldman, J.P. Morgan Chase & Co., and Citigroup offset trading declines with gains in other businesses such as commercial lending or private-equity investing.
Morgan Stanley reported a 2.1% drop in trading revenue, the smallest decline reported by any big bank this quarter. At Goldman, whose securities business most closely resembles -- and competes with -- Morgan Stanley's, trading revenue was off by 17%.
The figure that stands out is $1.24 billion from trading debt, currencies and other fixed-income products. That business is traditionally a laggard for Morgan Stanley, with its smaller balance sheet and history of bungling risk.
But it has been performing better over the past year following a leadership shake-up that saw its top stock trader, Ted Pick, take over all of sales and trading. This marks the fifth straight quarter of $1 billion-plus revenue, a bar set by Mr. Gorman last year, and once again tops Goldman Sachs, which continues to struggle in fixed-income trading and posted a 40% decline in that business Tuesday.
Revenue was flat in stock trading, Morgan Stanley's strength. The firm has outmaneuvered peers in courting business from so-called "quant" hedge funds that trade huge volumes of stocks in fractions of a second.
Morgan Stanley's wealth-management business, which manages about $2.2 trillion in client assets, took in a best-ever $4.15 billion in revenue last quarter. The unit's profit margin hit 25%, the high end of a goal set last year by Mr. Gorman, as it continues to sweep in client cash and find more profitable uses for it, like lending.
Loans to wealth clients hit a record $74 billion as of June 30, with gains across all three major products: mortgages, securities-backed loans and tailored lending, Mr. Pruzan said. As interest rates rise, Morgan Stanley is hustling to lend out a surfeit of deposits it picked up in the multiyear acquisition of of SmithBarney.
In investment banking, where Morgan Stanley is generally a top-three player, revenue rose 28%, as big gains in stock and debt underwriting overcame flat merger fees.
Morgan Stanley's smallest division, investment management, reported revenue of $665 million, up 14% from a year ago. The business manages about $435 billion, making it about one-tenth the size of index-fund giant Vanguard Group.
Unlike rivals, Morgan Stanley offers no index funds that simply mirror the performance of certain corners of the stock market. Instead, it is betting on active stock pickers who can beat the market -- a tall order lately as stock prices have churned indiscriminately higher.
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(END) Dow Jones Newswires
July 19, 2017 08:55 ET (12:55 GMT)