Morgan Stanley hits CEO's bond trading target, surprising analysts

Wed Jul 20, 2016 7:03pm EDT
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By Olivia Oran and Sudarshan Varadhan

(Reuters) - Morgan Stanley, which has struggled for years to improve its bond-trading business, may finally be turning the corner.

The Wall Street bank reported a lower second-quarter profit on Wednesday, but beat expectations by delivering relatively strong bond-trading revenue and cutting expenses.

Chief Executive James Gorman has faced tough questions from analysts about the state of its fixed income, currency and commodities trading unit since taking the helm of the bank in 2010. Morgan Stanley scaled back the business in an effort to make it more profitable, but its choppy revenue led some to wonder whether the bank was on the right course.

But so far this year, the business is hitting a revenue target Gorman laid out, and many analysts attributed Morgan Stanley's earnings beat to the bond trading unit. In discussing results, Gorman sounded triumphant, defending his decision to maintain the business on a smaller scale.

"(It's) the topic of the day, the year and the century, it would appear," he said when asked whether the results were sustainable. "Listen, my view was that there was a general over-reaction to the underperformance."

In both quarters this year, Morgan Stanley produced more than the $1 billion per quarter in revenue from fixed income, currency and commodities (FICC) trading that Gorman recently set out. As part of the restructuring effort, the bank has reduced headcount there by 25 percent, slashed risky assets and focused on transactions that require little capital under new regulations.

Gorman advised analysts to expect quarterly fluctuations, but said the target was achievable over the long term.

"At the time it almost sounded like an aspirational goal, but clearly they did well," said Oppenheimer analyst Chris Kotowski. "Maybe ... we are closing in on a sustainable and predictable level."   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in the Manhattan borough of New York City, January 20, 2015.    REUTERS/Mike Segar