Morgan Stanley's Stock, Bond Traders Push Profit to Record

(Bloomberg) -- Wall Street’s top stock traders got some help from their bond brethren.

Morgan Stanley posted a surprise jump in fixed-income trading, which combined with better-than-expected equities results helped push revenue above $11 billion for the first time ever. First-quarter profit, boosted by corporate tax cuts, also rose to an all-time high.

Chief Executive Officer James Gorman has overseen a recovery in his firm’s bond-trading business even as the industry suffered in recent years from calm markets that cut demand for fixed-income services. Now, rising rates and political uncertainties offer a chance for the unit, led by Sam Kellie-Smith, to boost revenue and catch up to its stock-trading business, which is the world’s biggest.

“The beat came from almost every revenue line item, but was largely driven by sales and trading,” Chris Kotowski, a bank analyst at Oppenheimer & Co., wrote in a note to clients. He described the bank’s results as “firing on all cylinders.”

Shares of the company, which gained 1.5 percent this year through Tuesday, advanced 2.6 percent to $54.65 in early New York trading at 8:03 a.m. Mitsubishi UFJ Financial Group Inc., Morgan Stanley’s biggest shareholder, said in a separate statement it would sell shares back to the bank to keep its ownership interest below 24.9 percent, the level it agreed to when the alliance began in 2008.

The bank credited securitized products and foreign-exchange for driving the fixed-income trading division’s performance.

“Debate around the direction of rates and speed of rates led to more volatility,” Chief Financial Officer Jonathan Pruzan said in an interview.

Morgan Stanley's Stock, Bond Traders Push Profit to Record

Morgan Stanley experienced “a little bit of a slowdown in the second half of the quarter as some of the dialogue shifted to geopolitical risk and trade wars and the domestic political headlines,” Pruzan said. “Seasonality is going to play a part here, so I don’t think all these results are sustainable across all of the quarters.”

Morgan Stanley used electronic systems to grab the stock-trading business of quantitative hedge funds that have increased assets in recent years. Morgan Stanley President Colm Kelleher said he wants to do the same for bonds.

Investment-banking revenue climbed 7 percent to $1.51 billion, better than the 1.4 percent slump that analysts expected, according to estimates compiled by Bloomberg. The New York-based bank was the No. 1 adviser so far this year on mergers and acquisitions, data compiled by Bloomberg show.

Highlights

  • Per share earnings were $1.45, beating the $1.25 estimate of 19 analysts surveyed by Bloomberg.
  • The efficiency ratio, a measure of costs to revenue, was 69 percent, an improvement from 71 percent a year earlier.
  • At wealth management, the second-largest division, fees increased 8 percent to $4.37 billion, a smaller jump than analysts predicted.
  • At investment management, which Gorman has been trying to expand, revenue rose 18 percent to $718 million. Assets under management were $469 billion, compared with $421 billion a year earlier.

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