Morgan Stanley beats estimates on big bond trade gains

Thu Oct 18, 2012 5:52pm EDT
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By Lauren Tara LaCapra

(Reuters) - Morgan Stanley (MS.N: Quote) reported better-than-expected adjusted quarterly earnings on Thursday as it boosted revenue from trading bonds, long a sore spot for the investment bank.

Morgan Stanley's bond trading business suffered over the summer, hurt by an expected ratings downgrade by Moody's. But the cut was smaller than many observers had feared, and Morgan Stanley's trading business revived in the third quarter, Chief Financial Officer Ruth Porat said.

"Clients re-engaged and continued to re-engage throughout the quarter," Porat told Reuters in an interview.

Morgan Stanley laid off hundreds of its fixed-income trading staff after the financial crisis, leaving it poorly positioned to benefit from the frenzied bond trading that occurred in 2009 and 2010.

For more than three years, executives have been talking about boosting market share in fixed-income trading. Last year the bank set a target of raising its share of Wall Street's bond trading revenue pie by 2 percentage points. At the time, analysts said its share was 6 percent.

Progress has been halting, but on Thursday Morgan Stanley said bond-trading revenue in the third quarter climbed 33 percent from a year earlier to $1.5 billion, excluding the accounting impact of changes in value of the bank's debt.

Overall adjusted trading revenue rose 21 percent, to $3.6 billion, with gains in interest rate and credit trading. Most of the increase came from increased client activity, rather than rising asset values, Porat said.

Despite better-than-expected results in both its bond trading and wealth-management operations, Morgan Stanley shares fell 3.8 percent on Thursday, with analysts citing concerns about the sustainability of its performance, and investor concerns about high costs weighing on returns.   Continued...

The Morgan Stanley worldwide headquarters building is pictured in New York June 22, 2012. REUTERS/Brendan McDermid