Morgan Stanley reported earnings that almost doubled, beating analysts' estimates, on a 9 percent jump in revenue from trading stocks and bonds.
Third-quarter net income climbed to $1.71 billion, or 84 cents a share, from $906 million, or 45 cents, a year earlier, the New York-based bank said today in a statement. Excluding an accounting adjustment and a tax benefit, earnings were 65 cents a share, topping the 54-cent average estimate of 23 analysts surveyed by Bloomberg.
Chief Executive Officer James Gorman, 56, has sought to boost returns from fixed-income trading even while shrinking staff and capital allotted to the unit. Revenue from the business in the first nine months climbed 5 percent, breaking a four-year streak of declines for that period.
"July was a good month on the fixed-income side, August was slow, and everything was going to come down to September, and it seems September delivered," Devin Ryan, a bank analyst at JMP Group Inc. in New York, said before the results were announced. "It was a small window, but that's encouraging."
Morgan Stanley rose 4.5 percent to $34 at 7:39 a.m. in New York. The shares climbed 3.7 percent this year through yesterday, outpacing the 0.7 percent gain for the 85-company Standard & Poor's 500 Financials Index.
Revenue excluding accounting adjustments rose to $8.69 billion from $8.12 billion a year earlier. Book value per share rose to $34.17 from $33.46 at the end of June. Return on equity, a measure of how well it reinvests earnings, was 9 percent, including the tax benefit.
The accounting gain is known as a debt valuation adjustment, or DVA. It stems from decreases in the value of the company's debt, under the theory it would be less expensive to buy it back. The firm had a $215 million gain from DVA, versus a $171 million charge in the third quarter of 2013.
Revenue from fixed-income sales and trading, run by Michael Heaney and Robert Rooney with commodity trading co-heads Colin Bryce and Simon Greenshields, was $997 million, excluding DVA. That surpassed estimates of $895 million from Matt Burnell at Wells Fargo & Co. and $825 million from Macquarie Group Ltd.'s David Konrad.
Goldman Sachs Group Inc. posted fixed-income revenue of $1.98 billion, and Citigroup Inc. reported $2.98 billion.
In equities trading, headed by Ted Pick, Morgan Stanley's revenue increased 4 percent from a year earlier to $1.78 billion, excluding DVA. That compared with $1.03 billion at Bank of America Corp. and $1.46 billion at Goldman Sachs. It also topped Konrad's estimate of $1.6 billion and Burnell's $1.68 billion.
JPMorgan Chase & Co. and Citigroup Inc. posted earnings this week that topped analysts' estimates on bigger-than- expected increases in fixed-income trading revenue. The firms cited a pickup in volatility and volume in currency and bond markets in September.
Morgan Stanley is seeking to boost the return on equity of its fixed-income trading business to higher than 10 percent, and has been held back by low returns in commodities, interest rates and currency trading. One part of the plan was agreeing to sell its oil-merchant business to Russian company OAO Rosneft.
The bank said last week the deal may not be completed in time to beat a year-end deadline, as it needs U.S. regulatory approval and Rosneft faces U.S. sanctions. Morgan Stanley Chief Financial Officer Ruth Porat had said the sale would boost returns since the unit broke even last year and had $4 billion in risk-weighted assets.
Morgan Stanley was the second-ranked adviser on global announced mergers and acquisitions in the first nine months, according to data compiled by Bloomberg. It also ranked third in underwriting global equity offerings and fourth in U.S. high- yield debt, the data show.
The firm boosted its targets for the wealth-management unit's profit margin earlier this year, saying it can produce 25 percent by the fourth quarter of next year even without help from higher markets or interest rates. The progress in the brokerage hasn't come without hiccups.
Morgan Stanley will swallow some losses incurred by customers who bought mutual funds after the bank failed to make the fund prospectuses accessible online, according to a letter obtained by Bloomberg News last month. The firm didn't provide an estimate of what it would cost to cover the client losses.
Gorman's plan also relies in part on increasing dividends and share buybacks. He said in April he hopes to return as much as 100 percent of earnings to shareholders in the next few years. The firm in March announced a $1 billion stock-buyback plan and doubled its dividend to 10 cents a share.