Morgan Stanley earns $1.58B in 2nd quarter as investment banking, brokerage businesses grow

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Morgan Stanley profit jumps, tops forecasts

NEW YORK — Morgan Stanley said Wednesday its second-quarter net income rose to $1.58 billion, easily topping forecasts as its Smith Barney brokerage helped the bank recover from a loss a year ago.

Morgan Stanley joined other banks in reporting that its trading revenue fell from the first quarter, the result of the stock market’s spring plunge. But the company, which was hurt a year ago by a conservative trading strategy and steep losses on real estate investments, was able to beat analysts’ overall revenue and profit expectations for this latest quarter.

Morgan Stanley’s net income after payment of preferred stock dividends rose to $1.09 per share from a loss of $1.10 per share a year earlier, when it lost $1.26 billion.

Earnings from continuing operations, which excludes special charges, were 80 cents per share. Revenue jumped 53 percent to $7.95 billion.

Analysts polled by Thomson Reuters forecast earnings of 46 cents per share on revenue of $7.93 billion.

The company’s stock rose $2.55, or 10.1 percent, to $27.77 in midday trading.

Morgan Stanley’s results came a day after competitor Goldman Sachs Group Inc. reported an 83 percent drop in profits as trading revenue fell sharply. Goldman also took charges to cover its civil fraud settlement with the Securities and Exchange Commission and costs tied to paying taxes on employee bonuses in Britain. Morgan Stanley included the cost of that tax in its compensation expenses for the quarter.

The impact of the volatile stock market was less at Morgan Stanley. It saw trading revenue, or money made on buying and selling stocks and other securities, fall 11 percent to $3.35 billion from the first quarter. Trading revenue nearly doubled from the second quarter last year.

Morgan Stanley also draws a large portion of its revenue from its retail brokerage business, unlike Goldman, which relies on institutional clients for its business. The brokerage unit, Morgan Stanley Smith Barney, generated $3.07 billion in revenue during the second quarter, compared with $1.92 billion during the year-ago period. Morgan Stanley acquired a majority stake in Smith Barney from Citigroup Inc. during the middle of the second quarter last year, so year-ago results don’t include a full quarter of business.

Morgan Stanley Smith Barney revenue accounted for 39 percent of total revenue in the second quarter, up from 34 percent during the first quarter

Kevin Pianko, a partner at WeiserMazars, said CEO James Gorman has put a greater emphasis on the retail side of the business. Gorman and other top managers, who took over the company Jan. 1, “took a position that the retail side was more important, and that’s a more stable business” Pianko said.

But retail customers have also cut back their investing activities, especially after the so-called “flash crash” on May 6, said Ruth Porat, Morgan Stanley’s chief financial officer. That was the day when the Dow Jones industrials fell to a loss of nearly 1,000 points in less than a half-hour. The slowdown in activity from all clients has continued into the current quarter, Porat said.

Customers are still taking a “muted approach to the market,” she said.

Future growth is also somewhat unclear because of the overhaul of financial regulations that President Barack Obama signed into law Wednesday. Government agencies must now write the details of the regulations, and banking industry analysts say it will be some time before their effect on banks including Morgan Stanley is known.

Porat said the bank is “still really assessing” the potential effects of regulation reform.

Morgan Stanley set aside $3.89 billion during the quarter for compensation, including $361 million to cover the special tax on bank employee bonuses in Britain. Compensation costs accounted for 49 percent of revenue during the second quarter, the same amount as in the first quarter.