Morgan Stanley reported profit that beat analysts' estimates and the highest adjusted revenue in more than five years as equity trading and brokerage revenue jumped.
First-quarter net income rose 59 percent to $2.39 billion, or $1.18 a share, from $1.51 billion, or 74 cents, a year earlier, the New York-based company said Monday in a statement. Profit was 85 cents a share excluding an accounting gain and a tax benefit, topping the 78-cent average estimate of 24 analysts surveyed by Bloomberg.
Chief Executive Officer James Gorman has won support from investors for his strategy of shrinking the fixed-income unit and relying more on trading stocks and advising wealthy individuals on their investments. Return on equity for the first quarter was 10.1 percent excluding the adjustments, helping Gorman with his goal of increasing annual ROE above 5 percent for the first time since 2010, the year he took over.
"It was a pretty strong beat considering most of it came through higher revenue," Shannon Stemm, an analyst at Edward Jones & Co. in St. Louis, said in a phone interview. "It was good to see them hit their return-on-equity target of above 10 percent for the first time in a while."
Revenue excluding accounting adjustments known as DVA rose to $9.78 billion from $8.87 billion a year earlier. Book value per share climbed to $33.80 from $33.25 at the end of December.
Morgan Stanley shares, which fell 5.3 percent this year this year through Friday, advanced 0.6 percent to $36.98 at 10:21 a.m. in New York. The stock more than doubled in the past 2 1/2 years, including a 24 percent jump in 2014 that led the biggest U.S. investment banks for a second straight year.
The investment-banking and trading division, led by Colm Kelleher, 57, generated $5.46 billion in the first quarter, up 17 percent.
In equities trading, headed by Ted Pick, Morgan Stanley's revenue rose 33 percent from a year earlier to $2.27 billion, excluding DVA. That compared with $1.15 billion at Bank of America Corp. and $2.34 billion at Goldman Sachs Group Inc. Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods Inc., estimated equities revenue of about $1.79 billion, while Barclays Plc's Jason Goldberg predicted $1.85 billion.
"The big theme across products has been the increase in investor interest outside the U.S., in particular U.S. investors focused on opportunities in Europe and Asia," Chief Financial Officer Ruth Porat said in an interview.
Monday's earnings announcement will be the last for Porat, who's leaving to take the same role at Google Inc. Morgan Stanley named Jonathan Pruzan as her successor last month.
Revenue from fixed-income sales and trading, run by Michael Heaney and Robert Rooney with commodity trading co-heads Nancy King and Peter Sherk, climbed 15 percent to $1.9 billion, excluding DVA. That topped estimates of $1.74 billion from Kleinhanzl and $1.65 billion from Goldberg.
Fixed-income revenue climbed even as the risk-weighted assets in the business, which determine how much capital it requires, dropped to $174 billion, Porat said on a conference call with analysts. That's below the bank's year-end target of $180 billion.
The bank produced a jump in commodities revenue despite scaling back in that area, including selling its stake in oil- transportation company TransMontaigne Inc. in July. Morgan Stanley is gathering bids for its oil-merchanting business, including from Castleton Commodities International LLC, which offered more than $1 billion, a person briefed on the discussions said this month.
Goldman Sachs Group Inc. and JPMorgan Chase & Co. reported earnings last week that topped analysts' estimates on increases in trading revenue. Bank of America Corp. and Citigroup Inc. each posted trading revenue declines of more than 5 percent.
Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.17 billion in first-quarter revenue. That figure, up 3 percent from a year earlier, included $471 million from financial advisory, $307 million from equity underwriting and $395 million from debt underwriting.
The firm is the fourth-ranked adviser on global announced mergers and acquisitions so far in 2015, according to data compiled by Bloomberg.
The brokerage division posted net income of $535 million on net revenue of $3.83 billion as assets in fee-based accounts climbed 11 percent. The unit had a 22 percent pretax margin. Morgan Stanley has said it can maintain a margin of 22 percent to 25 percent by the end of this year even without help from higher markets or interest rates.
Compensation, the firms' biggest expense, climbed 5 percent to $4.5 billion in the first quarter. That represented 46 percent of revenue, down from 48 percent a year earlier. Morgan Stanley took a charge last year to speed up vesting of deferred awards so it would recognize less of the cost in this and future years.
In four of the five previous quarters, the firm cut its previously announced earnings because of legal or other costs within six weeks of reporting them.
The bank is in talks to settle a New York state probe into its marketing of mortgage-backed securities for about $500 million, mostly in the form of relief for struggling home buyers, the Wall Street Journal reported Sunday, citing unidentified people familiar with the matter. A final agreement isn't imminent and the size and terms are still being worked out, the newspaper said.