Change of fortune in bond trading boosts Morgan Stanley profit

Wed Apr 19, 2017 1:50pm EDT
 
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By Olivia Oran and Sruthi Shankar

(Reuters) - Morgan Stanley (MS.N: Quote) surprised Wall Street on Wednesday by producing a 74 percent jump in quarterly profit on the strength of a business that analysts and investors had for years written off as dead.

The sixth-largest U.S. bank generated $1.7 billion in revenue from bond trading in the first quarter, the most in two years. The figure matched what Morgan Stanley had produced before cutting 25 percent of the business's staff, showing that the bank can do more with less. The bank also delivered more from bond trading than arch rival Goldman Sachs Group Inc (GS.N: Quote), a rare feat.

"This is quite a number for a company that just two years ago was setting a billion dollars a quarter as an aspirational goal," said Oppenheimer analyst Chris Kotowski.

Morgan Stanley's traders managed to navigate inconsistent trading conditions through the quarter and picked up market share along the way, Chief Executive James Gorman and Chief Financial Officer Jonathan Pruzan said on a conference call with analysts. Performance was particularly good in the Americas region, helped by the Federal Reserve's decision to raise interest rates in March.

"We ... went through a major restructuring," said Pruzan, referring to the staff cuts. "We're now generating significantly more revenues than we had before that restructuring with lower expenses and less people, so the operating leverage in that business has been very good."

Morgan Stanley shares rose 3 percent to $42.44 in morning trading.

Through Tuesday's close, Morgan Stanley shares had risen about 20 percent since the U.S. presidential election in November, compared with an 18 percent rise in KBW Bank index .

Morgan Stanley's bond trading business has been a near-perennial loser in the years following the financial crisis. Gorman outlined a plan in 2012 to severely cut back on the business, which has since gone through several staff reductions and reduced risk-weighted assets by hundreds of billions of dollars.   Continued...

 
The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in New York, U.S. April 17, 2017. REUTERS/Shannon Stapleton