By Peter Rudegeair And Justin Baer
Morgan Stanley joined many of its largest peers in posting
higher first-quarter profits as the Wall Street firm benefited from
busy markets and a flurry of corporate mergers.
The results beat analysts' estimates, lifting Morgan Stanley's
shares by 1.3% to $37.21 in midday trading.
The New York-based bank posted a first-quarter profit of $2.39
billion, up 59% from $1.51 billion in the same period of 2014. On a
per-share basis, Morgan Stanley's profit was $1.18, or 85 cents
when stripping out accounting adjustments. Analysts polled by
Thomson Reuters had expected earnings of 78 cents a share.
Morgan Stanley reported revenue of $9.91 billion, or $9.78
billion excluding accounting adjustments, its highest quarterly
total in nearly eight years and its second-highest ever, according
to the company. Analysts had projected $9.17 billion.
"This was our strongest quarter in many years with improved
performance across most areas of the firm," Chief Executive James
Gorman said in a news release.
Mr. Gorman has sought to reorient the bank away from
unpredictable businesses such as bond trading to more consistent
ones like wealth management. He appeared to achieve success in
2014, though it was offset somewhat by a $2.6 billion settlement
announced in February that resolved a U.S. Department of Justice
investigation into mortgage bonds it sold in the run-up to the
financial crisis.
The bank is also in discussions with New York's attorney general
over a potential $500 million settlement over similar
mortgage-related issues, The Wall Street Journal reported
Sunday.
Trading revenue was $4.08 billion in the quarter, up 26% from
$3.24 billion in the same period a year ago. At rival Goldman Sachs
Group Inc., first-quarter trading revenue rose 23%.
Within trading, revenue from bonds, foreign-exchange and
commodities climbed 16% to $2 billion, and revenue from equities
increased 31% to $2.29 billion.
Ruth Porat, the firm's finance chief, told The Journal that
Morgan Stanley had better results trading commodities and
currencies, as well as government bonds and other securities used
to bet on the direction of interest rates. Equities, the division
where stocks and derivatives based on them trade, was "strong
across all products and strategies," she added. The firm saw
investor interest in Europe and Asia climb during the period, said
Ms. Porat, who is leaving the firm in coming weeks to become the
chief financial officer at Google Inc.
Ms. Porat, who at one point considered joining the Obama
administration's Treasury Department in a senior role, also said
that after "fundamental regulatory change" at banks in the last
five years, it could be time for a "time out" to "pause, digest and
assess" what's working.
She added that Morgan Stanley has welcomed many of the new
regulations, in contrast to other banks' "kicking and
screaming."
Morgan Stanley's investment banking division, where Ms. Porat
once helped advise clients including the U.S. Treasury during the
financial crisis, saw revenue during the first quarter rise 3.3% to
$1.17 billion. Fees from advising on deals rose 40% to $471
million, while fees from underwriting debt fell 19% to $395
million.
Revenue in Morgan Stanley's wealth-management arm rose to a
record $3.83 billion from $3.61 billion last year.
Investment-management revenue fell 11% to $669 million. The wealth
unit, which has grown in importance at the firm since the financial
crisis, also hit records for pretax profit, which rose to $855
million, and profit margin, which hit 22%.
Morgan Stanley's firmwide expenses rose to $7.05 billion from
$6.62 billion in the first quarter last year. Compensation and
benefits expense were $4.52 billion, up 5.1% from $4.31 billion a
year ago.
Return on equity, a commonly used measure of bank profitability,
rose to 13.5% from 8.5% in the first quarter a year ago, excluding
an accounting adjustment. Morgan Stanley executives have pledged to
lift return on equity above 10%. Excluding a tax benefit during the
quarter, Morgan Stanley's return on equity from continuing
operations stood at 10.1%.
It marked the first time the firm's ROE exceeded 10% since the
first quarter of 2010--Mr. Gorman's first as CEO.
Shares of Morgan Stanley have fallen 5.3% through Friday's close
since the start of 2015 compared with a 2.1% fall in the KBW index
of bank stocks over the same period.
Some one-time items helped the firm's results this quarter.
Morgan Stanley enjoyed an earnings benefit of $564 million because
the taxes it paid on the repatriation of foreign earnings ended up
being lower than expected. The bank said its effective tax rate in
the quarter was 13.6%, down from 46.2% in the fourth quarter and
33.1% a year ago. Ms. Porat said Morgan Stanley's tax rate would be
around 30% going forward.
Write to Peter Rudegeair at peter.rudegeair@wsj.com
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