Morgan Stanley finds Q3 commods markets "unfavorable"

NEW YORK (Reuters) - Morgan Stanley said its commodities trading risk rose by a notch in the third quarter but unfavorable market conditions prompted the Wall Street bank to keep those levels lower than a year ago.

Strong fixed income sales and trading revenue, as well as improved investment banking underwriting results, helped Morgan Stanley return to profit after three quarters of losses after the collapse of the U.S. financial sector a year ago.

Morgan Stanley said it saw solid performance for its interest rates, credit and currency products divisions but not commodities.

"Commodities net revenue reflected reduced levels of client activity and unfavorable market conditions," it said, without giving any earnings details for those divisions.

Morgan Stanley said its value-at-risk (VaR) for commodities -- or the maximum it could lose in a day trading commodities -- rose to $25 million in the third quarter from $23 million in the second quarter.

But compared to a year ago, that value was down $8 million, or almost 25 percent.

Morgan Stanley had reported stronger earnings from commodities in the second quarter despite a 65 percent year-on-year drop in its commodities VaR. [ID:nN22317530]

Other Wall Street banks with commodity operations, such as Goldman Sachs and JPMorgan Chase, had also reported a stronger second quarter for commodities compared with the third.

Commodity markets were volatile through most of the third quarter as the weakening dollar boosted prices and investors bet on global economic recovery, but physical demand remained scant for industrial raw materials such as crude oil and copper.

Goldman's commodities VaR fell 47 percent year-on-year in the third quarter, a sign that the No. 1 investment bank on Wall Street was more cautious than some rivals in chasing prices on a weak dollar.

JPMorgan increased its commodities VaR by about 36 percent since the first quarter, but its risk levels were still down 7 percent from a year ago.

(Reporting by Barani Krishnan; Editing by David Gregorio)