Morgan Stanley posted earnings that beat analysts’ estimates as stock-trading revenue jumped and wealth-management profit margins climbed to a record. The firm’s shares rose after it announced a $500 million stock buyback.
Second-quarter net income rose 66% to $980 million, or 41 cents a share, from $591 million, or 29 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting gains tied to the firm’s own debt and a charge related to buying the remaining stake in its brokerage joint venture, profit was 45 cents a share, topping the 43-cent average estimate of 26 analysts surveyed by Bloomberg.
Record brokerage revenue and an 18.5% pretax margin show progress toward the higher profitability targets Chief Executive Officer James Gorman laid out for the unit when Morgan Stanley bought the remaining stake in the venture last month. The firm also posted the highest equity-trading revenue among its peers for the first time in at least two years.
“The revenue beat was pretty much across the board, with investment banking, trading and commissions all doing a bit better than expected,” Chris Kotowski, an Oppenheimer & Co. analyst, wrote today in a report.
The firm said it would begin the stock-repurchase program after receiving no objections from the Federal Reserve. Chief Financial Officer Ruth Porat said in an interview that Morgan Stanley sought regulatory approval as part of the Fed’s annual stress test after it completed the brokerage purchase at the end of June.
The shares rose 3.7% to $27.53 at 9:54 a.m. in New York. While that’s the highest price since April 2011, it’s still 7% below the level at the end of 2009, when Gorman took over.
Gorman, 55, said in May that his firm can post a 10% return on equity, double that of 2012, by next year if regulators allow it to return a “reasonable” amount of capital to shareholders. ROE was 4.4% in the second quarter, down from 8% in the first quarter.
“We do see the update on the share buyback as a positive as capital return is an important leg of the ROE improvement story,” Fiona Swaffield, a Royal Bank of Canada analyst, wrote today in a note to investors. “While small, it is a positive step especially given some concerns over the impact of the new proposals on the supplementary leverage ratio.”
Morgan Stanley didn’t disclose its supplementary leverage ratio. U.S. regulators last week proposed minimum levels of 5% for holding companies and 6% for banking subsidiaries. The U.S. plan goes beyond the 3% global minimum requirement that the Basel Committee on Banking Supervision approved to help prevent a repeat of the 2008 financial crisis.
Revenue excluding accounting adjustments rose 26% to $8.33 billion. Book value per share increased to $31.48 from $31.21 at the end of March.
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 firm had a $175 million gain from DVA, versus a $350 million benefit in the second quarter of 2012.
Pretax profit from global wealth management, overseen by Greg Fleming, 50, jumped 60% to $655 million as revenue climbed to $3.53 billion. The division’s pretax profit margin rose to 19%, a record since the joint venture was established in 2009, from 13% in the second quarter of 2012.
The wealth-management unit can earn a pretax margin of more than 23% by 2015 as interest rates and stock markets climb, Gorman said last month. The unit can achieve a 20% to 22% margin absent any changes in the broader markets, he said.
In equities trading, headed by Ted Pick, Morgan Stanley’s revenue increased 58% from a year earlier to $1.81 billion, excluding DVA. That compared with $1.19 billion at Bank of America Corp. and $1.77 billion at Goldman Sachs Group Inc., excluding revenue from Goldman Sachs’s reinsurance business.
Keith Horowitz, an analyst at Citigroup, had estimated equities revenue of about $1.4 billion, while Barclays Plc’s Roger Freeman estimated $1.5 billion.
Second-quarter revenue from fixed-income sales and trading, run by Michael Heaney and Rob Rooney with commodity trading co- heads Colin Bryce and Simon Greenshields, was $1.15 billion, excluding DVA. That compared with estimates of $1.2 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.3 billion from Freeman at Barclays.
Fixed-income revenue rose 50% from $770 million in the year-earlier quarter. This year’s figure compared with $2.46 billion at Goldman Sachs and $3.37 billion at Citigroup.
“We reduced risk in May given concerns about the potential market volatility within fixed-income products,” Porat said. “Our view is that sets us up well going forward to support higher client activity.”
Morgan Stanley’s jump in fixed-income revenue came as it navigated markets that rival banks described as challenging. Long-term interest rates rose and risk premiums on debt widened in June after Fed Chairman Ben S. Bernanke indicated the central bank might taper its $85 billion in monthly bond purchases, which have boosted demand for higher yielding assets.
The increase marks a rebound from last year’s second quarter, when the firm posted its lowest fixed-income revenue in more than two years. The company has said the underperformance was caused in part by clients halting some trading amid a Moody’s Investors Service review of its credit rating that quarter, which resulted in a downgrade.
Heaney and Rooney were named to oversee the fixed-income business in May after Ken deRegt left to join investment firm Canarsie Capital Group. Gorman laid out a plan in June to boost returns in fixed-income trading above the company’s cost of equity after four of the five units failed to meet that metric last year.
Part of that plan may be a change to the firm’s commodities business. The firm is cutting 10% of its workforce in commodities, a person briefed on the matter said last month. Gorman said in June that he’s “carefully re-evaluating” the proper structure for the commodities unit after holding talks with Qatar’s sovereign-wealth fund last year about selling a stake in the business.
Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.08 billion in second-quarter revenue. That figure, up 22% from a year earlier, included $333 million from financial advisory, $327 million from equity underwriting and $418 million from debt underwriting.
Morgan Stanley was the second-ranked underwriter of global equity, equity-linked and rights offerings in the first half, behind Goldman Sachs, according to data compiled by Bloomberg. It was the No. 3 adviser on global announced mergers and acquisitions and the seventh-ranked underwriter of U.S. bonds, the data show.
Asset management reported a pretax profit of $160 million, compared with $43 million in the previous year’s period.