Has Morgan Stanley finally turned the corner? It's starting to look that way.
Morgan Stanley shares surged 8 percent after the Wall Street bank reported higher-than-expected second-quarter profit on Wednesday, a sign that its hiring spree of traders and salespeople is starting to pay off. Shares at one point rose more than 10 percent, helping the firm to its biggest single-day jump in share price in more than a year.
The surprisingly strong earnings could signal a turning point for Morgan Stanley, which was late to join rivals in the recovery from the financial crisis but now is winning key client business under James Gorman, who took over as CEO at the start of the year.
Morgan Stanley announced its results just hours before President Barack Obama signed a financial regulatory reform bill, which could have a significant impact on firms like Morgan Stanley and its chief rival, Goldman Sachs Group Inc .
Goldman reported an unusually slender second-quarter profit amid weakness in trading and investment banking, setting the stage for a Morgan Stanley disappointment. But it turned out to be a different picture from 2009, when Goldman boasted a record annual profit while Morgan Stanley reported a loss.
Morgan Stanley is very impressive, particularly in light of what happened to Goldman in the same period, said Gary Townsend, president and chief executive of Hill-Townsend Capital. Their trading revenues were not off nearly so much.
Morgan Stanley's return on equity from continuing operations was 12.2 percent for the quarter, compared with Goldman's adjusted 9.5 percent. The last time Morgan Stanley had the higher number was the first quarter of 2009.
The higher returns came even though Morgan Stanley took about the same risk as Goldman by one measure -- its trading value-at-risk was $139 million during the quarter, compared with $136 million for Goldman.
Value at risk indicates the firm's biggest possible loss in a single day for 95 percent of the trading days in the quarter.
Goldman reported big drops in sales and trading revenue, particularly in fixed income, citing weaker results in areas including corporate bonds, government debt, currencies and related derivatives.
Morgan Stanley said it saw more customer business in those areas, implying that its hiring of hundreds of traders over the last year has paid off.
Morgan Stanley's adjusted earnings for the second quarter were $1.4 billion, or 80 cents a share, compared with a loss of $138 million, or $1.36 a share, a year earlier.
Analysts on average had expected 46 cents a share, according to Thomson Reuters I/B/E/S.
Net revenues were $8 billion, up from $5.2 billion a year ago.
Gorman, in a call with analysts, said it was a difficult quarter for investment banking and trading, and the second half of the quarter was especially tough, a trend that could continue.
Earnings are likely to be choppy given the market environment, said Gorman, who formerly headed the bank's wealth management group.
But he said he was noticing heightened interest from clients around the world in Morgan Stanley's business, which is beginning to show in results.
We have consistently heard a refrain from our clients that they would like to do more business with Morgan Stanley, Gorman said.
Fixed income sales and trading revenue grew 160 percent from a year earlier to $2.3 billion. Equity trading revenue was up 21 percent to $1.4 billion.
Investment banking revenue was down 12 percent to $885 million amid sluggish M&A activity.
The bank reported net revenue of $4.5 billion in its institutional securities unit, up 52 percent.
John Mack and James Gorman are beginning to pull this thing together, said Mike Holland, founder of Holland & Co in New York, which oversees more than $4 billion of assets. Mack is Morgan Stanley's chairman.
Chief Financial Officer Ruth Porat said the firm's revamped global institutional securities division held up well during a difficult, volatile quarter.
It was a challenging market, Porat said in an interview. It is also the kind of environment where your clients want you.
Morgan Stanley this year has scored a number of high-profile clients.
The firm has been selected to be one of lead underwriters on General Motors Co's initial public offering, which could be worth as much as $20 billion. The U.S. Treasury also hired Morgan Stanley to be its sales agent as the government sells off 7.7 billion shares of Citigroup Inc that it acquired during the banking bailout.
Morgan Stanley might have been aided in winning new business by the legal proceedings against Goldman.
Goldman last week agreed to pay $550 million to settle civil fraud charges by the U.S. Securities and Exchange Commission. The charges stemmed from the packaging and marketing of a subprime mortgage-linked security that turned toxic during the financial crisis.
Goldman said on Tuesday that clients had stood by it through the legal proceedings.
Morgan Stanley's second-quarter results included a charge of $361 million related to the UK government's payroll tax on 2009 bank executive bonuses.
The bank showed signs that its bet on wealth management is beginning to pay off. Profit in its global wealth management group rose 11 percent to $110 million.
Porat said Morgan Stanley was glad to see financial regulatory reform advance.
The legislation targets lucrative trading in risky over-the-counter derivatives and aims to force banks to end trading for their own profits. It will also limit how much large financial firms can invest in hedge funds and private equity funds.
We are pleased to see the bill signed and moving forward as it puts some clarity around the issues, Porat said.
Firms like Morgan Stanley and Goldman say assessing the full impact on their earnings will take time.
Morgan Stanley shares were up $1.96, or nearly 8 percent, to $27.18 in afternoon trading.
(Reporting by Steve Eder; additional reporting by Dan Wilchins and Clare Baldwin; editing by Gerald E. McCormick and John Wallace)