UPDATE 4-Retail brokerage helps Morgan Stanley profit beats estimates

Fri Jan 17, 2014 3:45pm EST

(Adds investor comment, detail on wealth management business)

By Lauren Tara LaCapra and Tanya Agrawal

Jan 17 (Reuters) - Morgan Stanley posted stronger-than-expected fourth-quarter results, as its retail brokerage and asset management businesses won more assets from clients and benefited from rising stock markets.

The bank's retail brokerage business, which manages money for wealthy clients, reached the company's target for profit margins, and Morgan Stanley raised that forecast for the coming years. The bank's shares rose 4.2 percent to $33.33, their highest level since November 2009, when the bank was recovering from the financial crisis.

The results underscored how Morgan Stanley, the second largest U.S. investment bank, has retooled itself since it came uncomfortably close to failing in 2008. It now earns more revenues from brokerage and asset management than traditional investment banking businesses like underwriting stock offerings and trading bonds.

"They're doing what they set out to do, and I think it's a better direction to go in," said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon, which manages about $3.8 billion.

Chief Executive James Gorman still has work to do. The investment banking businesses, particularly its long-troubled bond trading efforts, were a drag on results in the quarter, and helped pull down Morgan Stanley's profit.

Net income for common shareholders in the fourth quarter fell to $133 million, or 7 cents a share, from $568 million, or 29 cents, in the same quarter in 2012.

"We've said pretty consistently we're a one-step-at-a-time management team," Gorman said on a conference call.

Excluding items such as $1.2 billion in legal expenses, the bank earned 50 cents per share, according to Thomson Reuters I/B/E/S, beating the average analyst estimate of 45 cents.

Retail brokerage generated $3.73 billion in revenue in the quarter, up from $3.33 billion a year earlier.

Income from the business rose, helped by its purchase of the 35 percent of the retail business it did not own from Citigroup Inc, its joint venture partner, in mid-2013. All of the income from the unit now goes to Morgan Stanley, which agreed in 2009 to buy Citigroup's Smith Barney unit over multiple years.

Brokers generate relatively steady fees for the bank, and the business is much less risky than areas like bond trading, where bad bets hobbled Morgan Stanley in 2008.

In the fourth quarter, the unit delivered a pretax margin of 19 percent, or 20 percent excluding a charge. Results were helped by positive inflows and higher commissions, as well as rising markets. Morgan Stanley raised its margin targets to a range of 22 percent to 25 percent by the fourth quarter of 2015, from a prior 20 percent to 22 percent.

The increased forecast is a positive, but Morgan Stanley's wealth business has lagged major rivals on the measure. Bank of America Corp's wealth business delivered a pretax margin of 26.6 percent in the quarter.

One way the bank hopes to boost its margins in wealth management is through lending more to clients. Morgan Stanley has been pushing advisers to make more loans, an effort that may be paying off. Chief Financial Officer Ruth Porat told Reuters in an interview that the bank's loans and lending commitments rose 48 percent in 2013 from 2012.

Anecdotally, Morgan Stanley brokers confirm that they are lending more. One adviser in California said he had a wealthy client recently who needed a quick loan to help buy a home for his grandchildren. Collateralized by the client's securities portfolio, the loan was approved in about a week and was paid off quickly when the grandchildren obtained a mortgage a few weeks later, said the broker, who spoke on condition of anonymity.

Only about five percent of wealth management clients currently have loans from the bank, significantly less than at competitors, but Morgan Stanley expects to bring that up to 10 percent over the next several year, consistent with competitors, a bank spokesman said.

TOUGH FOR INVESTMENT BANKING

Revenue at Morgan Stanley's investment management unit jumped 41 percent to $842 million.

But Morgan Stanley's investment banking performance was more mixed. Bond trading revenue fell 14 percent to $694 million, excluding an accounting adjustment.

Revenue from fixed income and related businesses like commodities trading have been hurt across Wall Street by falling bond prices, which weigh on client volume. Citigroup and Goldman Sachs Group Inc posted similar declines in revenue, but Bank of America and JPMorgan Chase & Co managed to boost their bond trading revenue. [ID: nL2N0KQ1SW]

Speaking on a conference call with analysts, CFO Porat said the bond trading business was hurt by "rates" products, which typically include U.S. government debt and other bonds with interest-rate risk but little credit risk.

As with most Wall Street banks, the equities market was a bright spot for Morgan Stanley in the latest quarter.

Equities trading revenue rose to $1.5 billion from $1.4 billion, while equity underwriting revenue rose 75 percent to $416 million on an increase in both initial public offerings and secondary stock offerings. (Reporting by Lauren Tara LaCapra in New York and Tanya Agrawal in Bangalore; Editing by Dan Wilchins, Ted Kerr, Jeffrey Benkoe and Benrard Orr)

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