(Bloomberg) -- Morgan Stanley, owner of the worlds largest brokerage, reported a 66% earnings increase that beat analysts estimates as trading revenue jumped and wealth- management profit margins climbed.
Second-quarter net income rose to $980 million, or 41 cents a share, from $591 million, or 29 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting gains tied to the firms own debt and a charge related to the purchase of the remaining stake in its brokerage joint venture, profit was 45 cents a share, topping the 43-cent average estimate of 26 analysts surveyed by Bloomberg.
Chief Executive Officer James Gorman, 55, last month completed the purchase of a brokerage joint venture with Citigroup Inc.s Smith Barney, capping a four-year effort to more than double the size of his banks wealth-management division. Gorman also boosted targets for that units margins and set a goal for next years profitability as he seeks to show progress in improving returns to fuel the stocks 39 percent jump this year to 97 percent of tangible book value.
Investors are interested in how they can build out the wealth-management unit now that the integration is over, and theyre hitting higher profitability targets, said Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis. Investors are willing to pay tangible book, but to pay more than that, I think we need to see more fundamental improvement.
Morgan Stanley rose 0.6 percent yesterday to $26.54 in New York trading. The shares climbed 26 percent in 2012, and are still 10 percent below their price at the end of 2009, when Gorman took over.
Gorman said in May that his firm can post a 10 percent return on equity, double that of 2012, by next year if regulators allow it to return a reasonable amount of capital to shareholders. ROE was 8 percent in the first quarter.
The wealth-management unit can earn a pretax margin of more than 23 percent by 2015 as interest rates and stock markets climb, Gorman said last month. The unit can achieve a 20 percent to 22 percent margin absent any changes in the broader markets, he said.
Bank of America Corp. reported second-quarter profit yesterday that beat analysts estimates as equity trading jumped and the bank had lower costs. Goldman Sachs Group Inc. posted earnings on July 16 that beat estimates on higher underwriting revenue and more gains from its debt investments.
Morgan Stanley said it had an increase in fixed-income revenue as it navigated markets that rival banks described as challenging. Long-term interest rates rose and risk premiums on debt widened in June after Federal Reserve Chairman Ben S. Bernanke indicated the central bank might taper its $85 billion in monthly bond purchases, which have boosted demand for higher yielding assets.
The increase marks a rebound from last years second quarter, when the firm posted less than half the fixed-income revenue of any of its U.S. competitors. The company has said the underperformance was caused in part by clients halting some trading amid a Moodys Investors Service review of its credit rating that quarter, which resulted in a downgrade.
Michael Heaney and Rob Rooney were named to oversee the fixed-income business in May after Ken deRegt left to join investment firm Canarsie Capital Group. Gorman laid out a plan in June to boost returns in fixed-income trading above the companys cost of equity after four of the five units failed to meet that metric last year.
Part of that plan may be a change to the firms commodities business. The firm is cutting 10 percent of its workforce in commodities, a person briefed on the matter said last month. Gorman said in June that hes carefully re-evaluating the proper structure for the commodities unit after holding talks with Qatars sovereign-wealth fund last year about selling a stake in the business.
Morgan Stanley was the second-ranked underwriter of global equity, equity-linked and rights offerings in the first half, behind Goldman Sachs, according to data compiled by Bloomberg. It was the No. 3 adviser on global announced mergers and acquisitions and the seventh-ranked underwriter of U.S. bonds, the data show.
Investors are looking for information about the firms so- called leverage ratio after U.S. regulators last week proposed minimum levels of 5 percent for holding companies and 6 percent for banking subsidiaries. The U.S. plan goes beyond the 3 percent global minimum requirement that the Basel Committee on Banking Supervision approved to help prevent a repeat of the 2008 financial crisis.