Morgan Stanley beats estimates as trading revenue jumps

By Anil D'Silva and Richa Naidu

REUTERS - Morgan Stanley reported a stronger-than-expected second-quarter profit as its bond and equities trading businesses handily outperformed those of its Wall Street rivals.

The results capped a robust quarter for big U.S. banks - Goldman Sachs Group Inc excepted - although many relied more on cost cuts and lower legal expenses than Morgan Stanley, which achieved strong results in most of its businesses.

"The quarter (for Morgan Stanley) looked really good, uncomplicated and straightforward across all the board, which is what really stood out," said Marian Kessler, co-portfolio manager of the Becker Value Equity Fund in Portland, Oregon, which manages about $3.3 billion in assets.

Morgan Stanley Chief Executive James Gorman has been focusing on equities trading and - particularly - wealth management as profit drivers for the No. 6 U.S. bank by assets as stricter regulations and capital requirements make it more difficult to trade bonds.

Revenue in the bank's equities trading business jumped 27 percent to $2.27 billion on an adjusted basis, beating arch rival Goldman, which reported revenue of $2 billion. Goldman had come out on top in the two preceding quarters.

Strength in equities trading was driven by derivatives and prime brokerage, which offers services to hedge funds and other professional investors, Chief Financial Officer Jonathan Pruzan said on a conference call.

Pruzan, who replaced Ruth Porat in March after she left for a similar role at Google Inc , also said the bank had received "positive feedback" from clients on a Moody's upgrade of the bank's credit ratings in May.

Moody's said the upgrade - the only two-notch increase among the 13 global banks it assessed - was based on the bank's increased business diversification, prospects for improved profitability and lower earnings volatility.

On an adjusted basis, Morgan Stanley's revenue from trading fixed-income, currency and commodities rose 25 percent to $1.27 billion in the three months ended June 30.

Fixed-income trading dragged on the earnings of other big Wall Street banks during the quarter as concerns ranging from the Greek debt crisis to the timing of a long-awaited U.S. interest rate hike kept traders on the sidelines.

Morgan Stanley's institutional securities business - which includes both bond and equity trading - accounted for 52.2 percent of overall revenue in the quarter, up from 49 percent a year earlier.

Revenue from equities trading accounted for about 24 percent of total adjusted revenue, while bond trading accounted for about 13 percent.

In 2006, bond trading accounted for more than 28 percent of revenue while equities trading accounted for about 19 percent.

Morgan Stanley's shares were up 0.4 percent at $40.35 in early afternoon trading after hitting $40.94, their highest since the financial crisis.

WEALTH MANAGEMENT MARGIN RISES

The bank's wealth management business achieved a pretax margin of 23 percent, up from 22 percent in the first quarter and 21 percent in the year-earlier quarter. Gorman has set a target of 22-25 percent for the business this year.

Net revenue in the wealth management division increased 4.7 percent to $3.88 billion, accounting for about 40 percent of total revenue, down from 43 percent in the same quarter of 2014.

Morgan Stanley has bet big on wealth management, completing the purchase of Citigroup Inc's stake in their wealth management joint venture in 2013.

Total adjusted net revenue rose 12.2 percent to $9.56 billion, helped by a 56 percent rise in revenue from Asia, which overtook EMEA as the bank's second-biggest market.

Morgan Stanley said net income fell to $1.67 billion, or 85 cents per share, from $1.82 billion, or 92 cents per share, a year earlier.

On an adjusted basis, the bank earned 79 cents per share - beating the average analyst estimate by 5 cents, according to Thomson Reuters I/B/E/S.

Still, the adjusted average return-on-equity of 9.1 percent remained below the 10 percent minimum set by Gorman.

Revenue from investment banking, which includes advising on takeovers and underwriting equity and bond issues, fell 1 percent to $1.61 billion.

Morgan Stanley ranked second globally after Goldman Sachs in advising on deals in the first half of 2015, according to Thomson Reuters data.

The five big Wall Street banks - excluding Wells Fargo Corp , which does not have a large investment banking business - reported total net earnings of $24.1 billion in the quarter, up $6.7 billion from the same quarter last year.

(Additional reporting by Olivia Oran and Sudarshan Varadhan; Editing by Ted Kerr)