Morgan Stanley's first-quarter profit fell nearly 50 percent, but the results were better than many analysts had forecast thanks to stronger-than-expected fixed-income trading revenue.

The bank's shares rose 2.9 percent as investors grew hopeful that its long-troubled bond trading business was closer to being fixed.

Morgan Stanley definitely still has a lot of work to do on revamping the fixed-income trading desk. But this quarter is a testament to the progress they've made, said Shannon Stemm, a stock analyst at brokerage Edward Jones.

The investment bank and brokerage also said Mitsubishi UFJ Financial Group Inc would own 22.4 percent of its shares after the Japanese bank agreed to swap convertible securities for common stock. The exchange will reduce Morgan Stanley's preferred dividend expense by about $780 million a year and boost its capital levels.

Morgan Stanley's bond trading business generated big losses for the bank during the financial crisis, and then lagged rivals during a recovery in 2009. Chief Executive James Gorman is pushing the division to gain market share and improve its performance.

In an interview with Reuters Thursday morning, Chief Financial Officer Ruth Porat said the division performed well in the first quarter in trading currencies and interest rate products like government debt, two key areas for Morgan Stanley's turnaround effort.

We're making progress, she said.

She attributed the decline in overall fixed-income trading to weak client volumes in areas like corporate bond trading.

Part of Gorman's efforts to improve fixed-income trading have included changing leadership. The bank earlier this year said Jack DiMaio, global head of interest-rate, currency and commodity trading, was leaving and that chief risk officer Kenneth deRegt would become global head of fixed-income sales and trading.

This is the first time that I have felt comfortable with the leadership across all of our fixed income businesses, Gorman said on a conference call Thursday.

Overall, Morgan Stanley posted quarterly net income for shareholders of $736 million, or 50 cents a share, down from $1.41 billion, or 99 cents a share, a year earlier. Revenue fell 16 percent to $7.6 billion.

WEALTH MANAGEMENT INCOME GROWS

Some businesses performed well. The wealth management group, a joint venture with Citigroup Inc, posted income for Morgan Stanley of $183 million, up 85 percent. The group reported 7 percent growth in client assets.

The bank's quarterly results included several special items, including an after-tax loss of 26 cents a share from its stake in a Japanese securities joint venture, and a gain of 30 cents a share linked to selling its stake in a stalled casino project in Atlantic City, New Jersey.

It was not immediately clear how Morgan Stanley's bottom line compared to the average Wall Street forecast, given the special items and the fact that not all analysts included the Japanese joint venture losses in their forecasts.

Most Wall Street banks have posted weaker fixed income revenue after a blow-out quarter a year earlier. The broad decline across Wall Street may have helped soften the blow for Morgan Stanley.

Goldman Sachs Group Inc posted a 28 percent decline for its fixed income customer trading business, while JPMorgan Chase & Co posted a decline of just 4 percent.

Morgan Stanley's joint venture partner in Japan, Mitsubishi UFJ, is entirely responsible for making sure the joint venture is fully capitalized, Morgan Stanley said in its earnings statement.

Morgan Stanley shares were up 75 cents to $26.79 in midday trading.

(Reporting by Lauren Tara LaCapra, additional reporting by Dan Wilchins; editing by John Wallace)

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