Morgan Stanley reported a better-than-expected profit on Wednesday, boosted by a surge in bond trading that helped all Wall Street banks last quarter.
Morgan Stanley's gains were especially notable. Its adjusted bond-trading revenue more than doubled, hitting Chief Executive James Gorman's revenue target for that business for the second quarter in a row.
The bank had struggled for years to improve in bond trading, which has volatile revenue and tough capital requirements to meet. Earlier this year, Morgan Stanley restructured the unit, cutting 25 percent of staff and appointing new leadership.
In an interview, Chief Financial Officer Jonathan Pruzan said the bank was on the right track, though it might be too soon to claim victory.
"The success we've had in the last quarter or two has boosted morale and confidence of the team," he said. "But these things take time and until we can do it for years as opposed to quarters, we're not going to declare success."
Though it is still early in the fourth quarter, Pruzan said the trading environment has so far been similar to the end of September.
Overall, Morgan Stanley's earnings applicable to common shareholders rose 62 percent to $1.5 billion, from $939 million in the same quarter a year earlier. Earnings per share rose to 81 cents from 48 cents, helped by stock buybacks.
Analysts had estimated earnings of 63 cents per share, according to Thomson Reuters I/B/E/S.
Revenue rose 15 percent to $8.9 billion. Analysts had expected revenue of $8.2 billion. Non-interest expenses rose just 4 percent, reflecting a cost-cutting program that Morgan Stanley hopes will shave $1 billion from annual expenses by next year.
That program, called Project Streamline, is on track despite costs associated with the bank's stress test resubmission as well as Brexit, Pruzan said.
Morgan Stanley's shares rose 0.8 percent to $32.57 at midday.
STRONG QUARTER Morgan Stanley wrapped up a surprisingly strong quarter for big U.S. banks. Goldman Sachs Group Inc, Morgan Stanley's closest rival, reported a better-than-expected 58 percent rise in third-quarter profit on Tuesday.
Bond trading was strong across Wall Street, driven by Britain's surprise vote to leave the European Union and bouts of anxiety about monetary policy around the world.
Morgan Stanley's bond-trading revenue rose to $1.5 billion in the third quarter from $583 million in the year-ago period, when stripping out accounting gains and losses related to the value of its own bonds.
"We obviously did much better than probably anybody felt this quarter ...," Gorman said during a call with analysts. "... But we did not and are not going to run any victory lap around fixed income."
Despite that rebound, Morgan Stanley posted an 8.7 percent return on equity, which is less than Gorman's stated target of 9 percent to 11 percent by the end of 2017.
Pruzan said he continued to believe that the bank's target ROE was achievable.
Equities sales and trading revenue, a traditional bright spot for the bank, edged up just 1 percent to $1.9 billion.
Revenue from investment banking fell about 7 percent to $1.23 billion, due to weaker M&A fees and capital markets activity.
Morgan Stanley ranked third to Goldman Sachs and JPMorgan Chase & Co in M&A fees collected during the quarter and fourth behind JPMorgan, Bank of America Corp and Goldman in fees from investment banking, which includes equity and debt underwriting, according to Thomson Reuters data.
Revenue from wealth management, which Morgan Stanley has been building for several years, rose 7 percent to $3.9 billion. The business hit a 23 percent pretax margin, in line with Gorman's target for year-end.
Gorman said to expect an announcement from the firm's wealth management executives in the coming weeks regarding how the bank will comply with the Department of Labor fiduciary rule. The rule, announced in April, sets a standard for brokers who sell retirement products and requires them to put clients' best interests ahead of their own bottom line.
Gorman hinted that providing choice to clients about different investing products remains a priority for the firm.
(Reporting by Sweta Singh and Sudarshan Varadhan in Bengaluru and Olivia Oran in New York; Editing by Lauren Tara LaCapra and Nick Zieminski)