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Morgan Stanley Beats Estimates on Smaller Drop in Fixed Income: Q2 Earnings

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Morgan Stanley, the best-performing stock this year among the five largest Wall Street banks, reported profit that beat estimates on a smaller drop in fixed-income trading revenue than analysts projected.

Second-quarter net income rose to $1.94 billion, or 94 cents a share, from $980 million, or 41 cents, a year earlier, the New York-based company said today in a statement. Excluding an accounting adjustment tied to the firm’s own debt and a tax benefit, profit was 60 cents a share, topping the 56-cent average estimate of 24 analysts surveyed by Bloomberg.

Morgan Stanley posted an 8% decrease in fixed-income trading, while larger rivals Citigroup Inc. and JPMorgan Chase & Co. saw declines of 12% and 15%, respectively. Chief Executive Officer James Gorman has cut jobs and sold commodity units in an effort to boost bond-trading returns to at least 10%.

“A lot of the bank’s big changes in fixed income have already been enacted,” Devin Ryan, an analyst at JMP Group Inc., said before the results were announced. “It’s about optimizing the assets that it has within fixed income and focusing on businesses that have higher return potential.”

Morgan Stanley rose 1.6% yesterday to $32.50 in New York trading. The shares climbed 3.6% this year, after jumping 64% in 2013 and 26% the year before.

Stock Trading

The bank has shown progress in equity trading, where it passed Goldman Sachs Group Inc. in the first quarter, and wealth management, where it has increased profit margins. Still, return on equity has remained below 10%, the firm’s estimate of its cost of equity.

Morgan Stanley, which earned a return on equity of about 5% in each of the past two years, has a plan to “in 2015 and beyond, sustainably drive ROE at 10% or higher,” Gorman, 56, said at investor conference last month.

Gorman’s plan relies in part on increasing dividends and share buybacks. He said he hopes to return as much as 100% of earnings to shareholders in the next few years. The firm announced a $1 billion stock buyback plan for the 12 months ending next March and doubled its dividend to 10 cents a share.

Morgan Stanley boosted its targets for the wealth- management unit’s profit margin earlier this year, saying it can produce 25% by the fourth quarter of next year even without help from higher markets or interest rates. Gorman has cited boosting lending to its 4 million brokerage customers as one lever for higher returns.

JPMorgan, Citigroup

JPMorgan and Citigroup posted earnings this week that topped estimates on smaller-than-expected drops in fixed-income trading revenue. Analysts had lowered profit projections for all the major banks after firms warned of slow bond markets in May, only to see a pick-up in June. Morgan Stanley has exited some units within its fixed- income and commodities division and has been shrinking capital dedicated to that segment. The bank had $199 billion of risk- weighted assets tied to the division at the end of March, down from about $300 billion in the second quarter of 2012. It said the figure would fall below $180 billion by the end of 2015.

The bank this month completed a sale of its stake in oil- transportation company TransMontaigne Inc. to NGL Energy Partners LP for $200 million. Morgan Stanley agreed in December to sell its oil-merchanting business to Moscow-based OAO Rosneft, and Gorman said last month he expects the Rosneft deal to be completed in the third quarter.

Morgan Stanley was the second-ranked adviser on global announced mergers and acquisitions in the first half, according to data compiled by Bloomberg. It was the fourth-ranked underwriter of global equity, equity-linked and rights offerings, the data show.

Check out ThinkAdvisor’s Q2 Earnings Calendar for the Finance Sector.