Robust fixed income trading results launched Morgan Stanley to a better-than- expected first-quarter profit on Wednesday, sending its shares up.
With its quarterly profit, Morgan Stanley joined in a rally that began last week with strong results from JPMorgan Chase & Co and continued with Goldman Sachs Group Inc's profit surge on Tuesday. The earnings were the first quarter under James Gorman, who became chief executive on January 1.
Morgan Stanley lagged behind Goldman in 2009 in the recovery from the financial crisis largely because Goldman's trading desks made out-sized profits, while Morgan Stanley scaled back on risk.
Goldman continued its trading prowess in 2010 -- but Morgan Stanley appeared to be cashing in as well. Morgan Stanley's first-quarter fixed income sales and trading revenues more than doubled to $2.7 billion from $1.2 billion a year ago.
It was a pleasant surprise from them, said Anton Schutz, president of Mendon Capital, which owns shares of Morgan Stanley. They finally delivered on the trading side. We've been waiting for them to do this and they've done it.
The firm has shaken up management in its trading divisions, hiring hundreds of traders and salespeople in the second half of 2009.
While we have made clear progress, we still have much work to do to achieve our long term goals, Gorman said during a call with investors.
Morgan Stanley reported net income of $1.4 billion, or 99 cents per share, compared with a loss of $578 million, or 57 cents per share, a year earlier.
Excluding items, it earned 82 cents a share while analysts on average expected a profit of 57 cents per share, according to a survey of analysts by Thomson Reuters I/B/E/S.
Net revenue was $9.1 billion.
Its shares were up 5.39 percent to $32.09 in morning trading.
Analysts from Deutche Bank called it a a solid quarter showing good progress, predicating a bounce in shares.
Morgan Stanley, which reported a yearly loss for 2009, is looking for a rebound year in 2010 under Gorman's leadership. Gorman shuffled his leadership team as he took the helm of the firm at the start of the year from John Mack, who stayed on as chairman.
Among Gorman's first moves were changing leadership in the institutional securities and asset management ranks. Both moves appeared to be paying off in the first quarter.
Gorman, along with Mack and the board, reducing (risk), they still were able to pull this one off in a way to give confidence that Gorman is already settling in and prospects are bright, said Michael Holland, founder of Holland & Co.
Morgan Stanley's asset management division, which reported eight straight quarters of losses, reported pre-tax income from continuing operations of $173 million compared with a loss of $283 million a year ago.
Gorman hired Gregory Fleming, a former Merrill Lynch chief operating, to run Morgan Stanley's asset management division, which is priority after struggling since the financial crisis.
One of Gorman's other chief tasks has been to lower Morgan Stanley's compensation ratio, which soared to 62 percent in 2009.
In the first quarter, Morgan Stanley set aside $2.2 billion for compensation, or 41 percent of revenues compared with 65 percent a year ago.
We are very focused on driving that compensation ratio down, said Ruth Porat, Morgan Stanley's recently appointed chief financial officer.
Morgan Stanley declined to discuss whether it was seeing any new interest from clients as a result of the charges facing Goldman.
On Friday, the U.S. Securities and Exchange Commission charged Goldman with fraud in the structuring and marketing of a debt product tied to subprime mortgages. Goldman said the charges were unfounded and it will defend itself vigorously against them.
The charges are prompting some rivals to try to poach business from Goldman [ID:nTOE63J079];
Schutz, of Mendon Capital, said such as Morgan Stanley could benefit from Goldman's troubles.
People want representation right now, Schutz said, adding Morgan Stanley is not facing the same political headwinds as Goldman.
Morgan Stanley is also in the process of integrating Morgan Stanley Smith Barney, the largest retail brokerage.
Morgan Stanley Smith Barney reported net new assets of $5.8 billion, compared with a loss $4.6 billion in the fourth quarter of 2009.
Porat said Morgan Stanley Smith Barney, a product of a joint venture with Citigroup Inc , had a very strong performance in what we view as a challenging environment.
She said broker attrition was at a historic low in the quarter.
Investment banking results were weak in the first quarter as initial public offering and merger markets remained soft.
Revenues were $1.1 billion, up from $873 million a year ago, but down from $1.7 billion in the fourth quarter of 2009.
Morgan Stanley shares closed at $30.45 on Tuesday, up 3.01 percent.
Morgan Stanley's shares trade at about 1.1 times their book value, or their value based on the company's assets minus liabilities. That level is below Goldman's ratio of 1.3.
(Reporting by Steve Eder; editing by Gerald E. McCormick, Dave Zimmerman and Andre Grenon)