REFILE-UPDATE 2-Morgan Stanley quarterly profit jumps on stock trading

Thu Jul 18, 2013 9:56am EDT

* Adjusted profit 45 cents a share vs Street view 43 cents

* FICC trading rev up 50 pct, stock trading rev up 38 pct

* Federal Reserve authorizes $500 mln share buyback

* Shares rise 3.5 pct in early trading

By Lauren Tara LaCapra

July 18 (Reuters) - Morgan Stanley posted a 42 percent increase in quarterly profit as stock trading revenue soared, the latest sign that the No. 2 U.S. investment bank is regaining its footing.

Income rose in all the bank's businesses. Profit from trading and investment banking was nearly six times higher than a year earlier, helped by stronger stock and bond trading, and profit in wealth management jumped 83 percent.

The bank said regulators approved the repurchase of $500 million of its stock, and Morgan Stanley shares rose 3.5 percent in early trading.

Chief Executive James Gorman has been trying to fix Morgan Stanley, which suffered big losses during the financial crisis. He has been focusing on measures such as improving profitability in the bond trading business and the wealth management unit, which until June was a joint venture with Citigroup Inc.

But Gorman still has work to do. Morgan Stanley's return on equity, a measure of how effectively the bank wrings profit from shareholders' money, was just 5 percent. That is up from 4 percent a year earlier but still less than half what investors expect.

Net income attributable to common shareholders rose to $802 million, or 41 cents per share, in the second quarter from $564 million, or 29 cents per share, a year earlier.

Excluding special items, Morgan Stanley earned 45 cents per share, beating analysts' average estimate of 43 cents, according to Thomson Reuters I/B/E/S.

The latest results included a gain related to changes in the value of the bank's own debt, largely offset by a charge from buying Citigroup's remaining share of the wealth management business.

Revenue rose 22 percent to $8.50 billion, while expenses rose 12 percent to $6.73 billion, signaling that the bank is keeping a lid on cost growth.

Morgan Stanley has achieved its targets for expenses, Ruth Porat, the bank's chief financial officer, said in an interview with Reuters.

"But we are continuing to focus on expense reduction. There's more to do," she added.

Morgan Stanley is the last of the big five Wall Street banks to report second-quarter earnings.

Like No. 1 U.S. investment bank Goldman Sachs Group Inc , JPMorgan Chase & Co, Bank of America Corp and Citigroup, Morgan Stanley easily beat analysts' profit expectations, thanks largely to strength in trading and underwriting early in the quarter before interest rates spiked.

MOVING PAST THE DOWNGRADE

Stock trading revenue jumped to $1.8 billion from $1.3 billion a year earlier, excluding the debt valuation adjustment, or DVA, which reflects gains and losses on banks' own debt.

Revenue from fixed income and commodities trading rose 50 percent to $1.15 billion, excluding DVA.

Last year's figures were hurt by a downgrade of the bank by Moody's Investors Service in June. Anticipation of the downgrade during the quarter cut into Morgan Stanley's bond trading revenue in particular.

Morgan Stanley had set a quarterly revenue benchmark for fixed income and commodities trading revenue of $1.5 billion, saying this is necessary to meet its cost of capital following a disappointing first-quarter.

As with its rivals, underwriting was a bright spot in the second quarter. Debt underwriting revenue rose 24 percent to $418 million, while equity underwriting revenue increased 16 percent to $327 million.

Advisory revenue rose 27 percent to $333 million despite weak M&A activity.

Wealth management revenue rose 10 percent to $3.53 billion, representing a profit margin of 18.5 percent.

Gorman is targeting a profit margin of at least 20 percent for the wealth management business by 2015, and has said the margin could top 23 percent if interest rates rise and market conditions improve.

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