Morgan Stanley's wealth management profits soared 20% year-over-year, boosted by growth in the firm's banking and lending services for its clients.

Profits grew to $561 million for the second quarter from $467 million for the year-ago period.

The increase came despite flat total non-interest revenue growth, which stood at $3.1 billion. Revenue from commission and fees actually fell 4% year-over-year to $490 million.

Interest income, which is partially derived from Morgan's lending products, mushroomed 27% to reach $782 million. The firm reported strong loan growth, as total securities-based and residential loans rose to $43.7 billion for the quarter from $31.1 billion, a 40% increase.

Morgan has been trying to grow its lending and mortgage services as it pursues a more holistic approach to wealth management. Executives have said that clients are looking to the firm to help them meet a wider range of needs. And serving those needs deepens the client relationship and boosts revenue.

"That part of the advice model is working better and better for us on a broader and broader basis," Greg Fleming, president of Morgan Stanley Wealth Management, said in an interview earlier this year.

On a conference call with analysts, Morgan Stanley CFO Ruth Porat, who will soon leave the firm for Google, said that executives see a lot more room for growth in this arena because of the size of the client base and because the firm is under-penetrated relative to its peers.

"We are focused on prudent loan growth," Porat said.

FALLING HEADCOUNT

The firm's bottom line has been improving at the same time that the advisor ranks are shrinking. Headcount dropped to 15,771 advisors for the quarter from 15,915 for the prior period. A year-ago the firm had 16,316 advisors.

While headcount fell, advisor productivity rose to $978,000 revenue per advisor from $905,000 for the year-ago period.

Total client assets, meanwhile, rose to $2.034 trillion from $2.002 trillion. The firm's asset growth has closely trailed that of Merrill, which reported $2.051 trillion in assets last week.

Compensation expenses relative to revenue continued to fall, sliding to 57% of revenue from 59%.

The firm's pre-tax margin rose to 23% for the quarter, up from 22% for the prior quarter and from 21% for the year-ago period.

Companywide, Morgan reported that profits were down 5% year-over-year, falling to $1.807 billion from $1.899 billion. The bottom line was buffeted by a 5% increase in non-interest expenses as well as a rise in an income tax provision, which jumped to $894 million from $387 billion for the prior quarter.

Earnings per diluted share fell to $0.85 per share from $0.92.

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