Morgan Stanley (MS.N) reported a stronger-than-expected first-quarter profit of $958 million, compared with a year-earlier loss of $119 million, as its wealth management business grew.
The sixth-largest U.S. bank by assets said on Thursday it earned 49 cents per share on a consolidated basis in the first three months of the year, compared with a loss of 6 cents per share a year earlier.
Excluding a charge related to debt value adjustment (DVA), or changes in the value of the company's debt, Morgan Stanley earned $1.2 billion, or 61 cents per share.
On the same basis, analysts had expected earnings of 57 cents, according to Thomson Reuters I/B/E/S.
However, revenue from fixed income and commodities trading fell to $1.5 billion from $2.6 billion a year earlier, reflecting declines in commodities and rates.
Shares of the bank, which has reported a profit excluding items in every quarter since the first quarter of 2012, were up slightly at $21.55 before the bell.
Excluding items, total revenue fell 4.8 percent to $8.48 billion, beating the average analyst forecast of $8.35 billion.
Revenue in the wealth management group, which had been expected to drive earnings, rose 5.4 percent to $3.47 billion, making up about 41 percent of total revenue.
Operating pre-tax profit in the wealth management business was the highest in the bank's history, Chief Executive James Gorman said in a statement.
Gorman has staked the future of the company on the wealth management business, arguing that it offers more stable returns that will help offset volatility in the bank's trading and investment banking businesses.
Gorman made good on his promise to deliver a "midteens" pre-tax margin in the business by June -- after initially aiming for 20 percent. The unit's profit margin was unchanged from the fourth quarter at 17 percent, compared with 11 percent a year earlier.
Record earnings from wealth management came not just from a pickup in stock and bond market values, but from higher transaction revenue, Chief Financial Officer Ruth Porat said in an interview.
Higher closed-end fund issuance also helped as firms tapped retail investors for new funds in equities and high-yield debt, she said.
"It really highlights the operating leverage in this business because it's not as though the markets have a robust new issue environment, and yet you see the impact on profitability," she said.
Expenses including compensation fell to $6.54 billion from $6.72 billion in the year-earlier quarter but were up from $6.11 billion in the fourth quarter.
Compensation expense slipped to $4.2 billion from $4.4 billion in the first quarter of 2012.
"MORE STABLE EARNINGS"
Morgan Stanley's revenue from wealth management has grown to $13.5 billion last year from $5.5 billion a year before the financial crisis. There have been setbacks, though, including cost overruns and problems with technology.
"Morgan Stanley has seen a huge shift to global wealth management, which should pay off," said Bernie Williams, vice-president of discretionary money management at USAA Investments, which has $55 billion in assets under management, including Morgan Stanley shares.
"I'm attracted to that business because it has fewer regulatory obstacles than trading and it provides more stable earnings," said Williams, who spoke before the bank's results were released.
The company's institutional securities business -- which includes merger advisory, stock and debt underwriting and trading -- reported net revenue excluding DVA of $4.41 billion, up from $3.60 billion in the fourth quarter but down from $5.11 billion in the first quarter of 2012.
Morgan Stanley's business model can make it difficult to compare to other banks and brokerages. Its closest competitors are Goldman Sachs Group Inc (GS.N), which is far more heavily weighted in trading and principal investments, and Merrill Lynch, which is owned by Bank of America (BAC.N).
Other big investment banks are divisions of commercial banks such as JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N), which do not have large retail brokerages.
Morgan Stanley and Citigroup jointly own brokerage Smith Barney, but Citi has been selling down its stake, leaving Morgan Stanley with about 65 percent of the venture.
Gorman said on Thursday that Morgan Stanley looked forward to buying the rest of Smith Barney once it gets regulatory approval.
(Reporting By Lauren Tara LaCapra in New York and Tanya Agrawal in Bangalore; Editing by Supriya Kurane)