The bank benefited from a $3.4 billion accounting gain, but its underlying businesses looked strong enough for investors to send its shares up 3 percent in morning trading.
Morgan Stanley has proved it can definitely get in there with the heavy hitters, said Shannon Stemm, financial services analyst for Edward Jones.
The third quarter was tough on Wall Street as the European debt crisis threw markets into turmoil, cut into securities issuance, and slowed down mergers.
But Morgan Stanley managed to post higher stock trading revenue, excluding accounting gains, even as JPMorgan Chase & Co
The European debt crisis weighed heavily on Morgan Stanley's debt during the quarter as investors fretted about the bank's exposure to France and other euro zone countries. But the bank said on Wednesday that its exposure to troubled countries was limited.
When you look at credit spreads and it's inconsistent with the strength we're seeing in our business ... of course it's frustrating, Chief Financial Officer Ruth Porat said in an interview.
The weakness in the bank's debt allowed Morgan Stanley to take the $3.4 billion accounting gain. Most of its rivals recorded similar gains in the quarter.
Morgan Stanley posted third-quarter earnings of $2.15 billion, or $1.15 per share, compared with a loss of 7 cents per share a year earlier. Revenue climbed 46 percent to $9.89 billion.
Excluding the DVA gain, it earned 2 cents per share.
The bank's shares rose 50 cents to $17.13 in morning trading.
BROKERAGE MARGIN RISES
One bright spot in results: The bank's Morgan Stanley Smith Barney retail brokerage business, a joint venture with Citigroup Inc
Morgan Stanley's share of that unit's income in the third quarter was $169 million, up from $144 million a year earlier. The unit's pre-tax profit margin rose to 11 percent from 9 percent. Its long-term goal is 20 percent.
Morgan Stanley said on Wednesday that its gross exposure to Greece, Ireland, Italy, Spain and Portugal was $5.69 billion at September 30, or $2.1 billion including hedges. The bank's equity, a measure of its net worth as a company, was about $60 billion as of June 30.
The bank said its exposure to France at September 30 was $1.53 billion, or a negative $286 million including hedges. A report on the financial blog Zero Hedge on September 22 pegged the bank's exposure to France at $39 billion at the end of 2010, which sparked fears about losses it might incur.
Revenue from its trading business more than doubled from a year earlier and climbed 24 percent from the second quarter. The sharp increases reflect the DVA gain.
Asset management revenue of $215 million fell 73 percent from the year-ago period and 67 percent from the second quarter due to paper losses on principal investments in its merchant banking and real estate investing business.
(Reporting by Lauren Tara LaCapra in New York; editing by John Wallace and Dan Wilchins)