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Portfolio > Economy & Markets > Fixed Income

Morgan Stanley Beats Estimates on Fixed Income Surprise

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Morgan Stanley reported profit that beat analysts’ estimates as a surprise jump in fixed-income results helped the firm post the only increase in trading revenue among the six biggest U.S. banks this year. The stock rose 3% in early New York trading.

First-quarter net income advanced 56% to $1.51 billion, or 74 cents a share, from $962 million, or 48 cents, a year earlier, the New York-based company said today in a statement. Excluding an accounting gain tied to the firm’s own debt, profit from continuing operations was 68 cents a share, topping the 60-cent average estimate of 26 analysts surveyed by Bloomberg.

A five-quarter rally in U.S. stocks has helped Chief Executive Officer James Gorman boost revenue from wealth management and gain market share in equities trading. The firm also saw a 9% increase in fixed-income trading revenue to a two-year high while its peers posted declines.

“Rates and foreign-exchange are bigger businesses for the big banks, while commodities, which had a little bit better quarter off a depressed base, and credit, which was more resilient, are bigger drivers for the bulge-bracket firms,” Devin Ryan, an analyst at JMP Group Inc., said before the results were announced.

Morgan Stanley rose 1.2% to $29.89 yesterday in New York. The shares dropped 4.7% this year through yesterday, after climbing 64% in 2013 and 26% the year before.

Revenue Rise

Revenue excluding accounting adjustments rose 3.5% to $8.8 billion from $8.5 billion a year earlier, the firm said. Book value per share increased less than 1% during the quarter to $32.38. The firm’s adjusted return on equity, a measure of how well it reinvests earnings, was 8.5%.

The accounting gain is known as a debt-valuation adjustment, or DVA. It stems from decreases in the value of the company’s debt, under the theory it would be less expensive to buy it back. The adjustment added $126 million to revenue in the first quarter, versus a $317 million charge a year earlier.

“We generated higher year-over-year revenues in all three of our business segments, demonstrating the momentum we have built across the firm,” Gorman said in the statement.

Morgan Stanley’s first-quarter revenue from fixed-income sales and trading, run by Michael Heaney and Robert Rooney with commodity trading co-heads Colin Bryce and Simon Greenshields, was $1.65 billion, excluding DVA. That compared with estimates of $1.25 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.32 billion from Sanford C. Bernstein & Co.’s Brad Hintz.

Fixed Income

Fixed-income revenue rose 9% from $1.52 billion in the year-earlier quarter. This year’s figure compared with $2.95 billion at Bank of America Corp. and $3.85 billion at Citigroup Inc.

In equities trading, headed by Ted Pick, Morgan Stanley’s revenue climbed 7% from a year earlier to $1.71 billion, excluding DVA. That compared with $1.15 billion at Bank of America and $1.3 billion at JPMorgan. Abouhossein had estimated equities revenue of about $1.45 billion, while Hintz estimated $1.61 billion.

Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.14 billion in first-quarter revenue. That figure, up 20% from a year earlier, included $336 million from financial advisory, $315 million from equity underwriting and $485 million from debt underwriting. Morgan Stanley set aside the same amount — $1.9 billion — to pay employees at its investment-banking and trading division. That meant the percentage of net revenue for the unit used for pay fell 2 percentage points to 41%.

Global Wealth

Pretax profit from global wealth management, overseen by Greg Fleming, 51, jumped 16% to $691 million as revenue climbed to $3.62 billion. The division’s pretax profit margin rose to 19% from 17% in the first quarter of 2013.

Asset management reported a pretax gain of $263 million, compared with $187 million in the previous year’s period. Assets under management rose $9 billion sequentially to $382 billion. Fleming has said the unit can reach $500 billion by the end of 2016.

Goldman Sachs Group Inc. also reported earnings today that topped analysts’ estimates as investment-banking revenue jumped to the highest level since the financial crisis. First-quarter net income fell 10% to $2.03 billion, the New York-based firm said.

JPMorgan posted earnings last week that missed analysts’ estimates on lower revenue from fixed-income trading and mortgages. Citigroup topped estimates as it reported a jump in equity trading and more fixed-income revenue than JPMorgan for the first time in six quarters.

Payout Plans

Gorman, 55, said in May that his firm can post a 10% return on equity by this year, doubling the measure of profitability from 2013, if regulators allow it to return a “reasonable” amount of capital to shareholders. The firm announced a $1 billion stock buyback plan and doubled its dividend to 10 cents a share after winning approval in the Federal Reserve’s stress test last month.

Morgan Stanley boosted its targets for the wealth-management unit’s profit margin, saying it can produce 25% by the fourth quarter of next year even without help from higher markets or interest rates. In February, the firm named Shelley O’Connor to lead its brokerage workforce and added her to its operating committee.

New Targets

O’Connor previously ran the unit’s private bank, and Gorman has cited a push to boost lending to its 4 million brokerage customers as a strategy for higher returns. The plan also calls for more interaction between the wealth-management and institutional businesses, and in March the firm merged the municipal-bond trading desks of the two divisions.

Amid slumping fixed-income revenue industrywide, Gorman has shifted the focus to return-based goals for that business rather than revenue. He has set a 10% return-on-equity target for each of the five businesses in the fixed-income trading division. Three of them hit that mark last year.

The firm exited some units within the fixed-income and commodities division and has been shrinking capital dedicated to that segment. The bank had $210 billion of risk-weighted assets tied to the business at the end of last year, and it said that figure would be less than $180 billion by the end of 2015, a year ahead of the initial schedule.

Morgan Stanley was the top-ranked adviser on global announced mergers and acquisitions in the quarter, working on Comcast Corp.’s merger with Time Warner Cable Inc. and Facebook Inc.’s purchase of WhatsApp Inc., according to data compiled by Bloomberg. It also was the second-ranked underwriter of global equity, equity-linked and rights offerings, the data show.


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