Morgan Stanley beats expectations on bond trading and cost cuts

The Wall Street bank's net income was $1.43 billion in the quarter ended June 30

Morgan Stanley reported a lower second-quarter profit on Wednesday, but beat expectations by delivering relatively strong bond-trading revenue and cutting expenses.

The Wall Street bank's net income attributable to common shareholders was $1.43 billion, or 75 cents per share, in the quarter ended June 30, compared with an adjusted $1.69 billion, or 79 cents per share, a year earlier.

Analysts on average had expected earnings of 59 cents per share in the latest quarter, according to Thomson Reuters I/B/E/S.

After adopting a new accounting method, Morgan Stanley's earnings no longer reflect changes in the value of its own debt. Adjustments for the year-ago period make the figures comparable.

Morgan Stanley's shares were up 3.5% at $29.18 in premarket trading.

Morgan Stanley has been working to transform its bond-trading business into one that focuses on transactions that require little capital under new regulations. It has scaled back in areas like physical commodities - cutting headcount by about 25% - and emphasized more commoditized products, like interest rate swaps.

But for years the bank has struggled with volatile results in the business. In the second quarter, it produced $1.30 billion in adjusted revenue from fixed income, currency and commodities trading (FICC), up 2.4% from the same period a year ago.

Chief Executive James Gorman recently set out a target for Morgan Stanley to deliver at least $1 billion worth of quarterly revenue from the business. So far this year, it's meeting that goal.

Morgan Stanley's equities trading business, which has been strong in recent years, reported $2.15 billion in adjusted revenue, a 5.5% decline from the year-earlier quarter.

Other Wall Street banks that have reported results so far, including JPMorgan Chase & Co, Citigroup Inc, Bank of America Corp and Goldman Sachs Group Inc have also reported better results from bond trading than from equities.

Morgan Stanley is in the midst of a $1-billion cost cutting program. The bank said total non-interest expenses fell 8.4% to $6.43 billion in the quarter. Compensation costs, its biggest expense, fell 8.9% to $4.02 billion.

As part of its cost-cutting effort, Morgan Stanley cut nonessential travel by half, Chief Financial Officer Jon Pruzan said on a conference call. It is also closing data centers and shifting employees to lower-cost hubs.

Following the results, Evercore ISI analyst Glenn Schorr issued a report cheekily titled "Morgan Stanley Beats on FICC (not a typo) & Cost Control."

However, Morgan Stanley is still falling short when it comes to a key measure of how well it's using shareholder money to produce profits. Its return on equity of 8.3% during the second quarter is less than the 10% minimum that many investors expect, and less than Gorman's stated target of 9 to 11% by the end of 2017.

Up to Tuesday's close, the bank's shares had fallen 11.4% since the start of the year.