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 The bank's retail brokerage business, which manages money for
wealthy clients, reached the company's pretax profit margin target,
and Morgan Stanley raised that target for the coming years.
The results underscored how Morgan Stanley, the second largest U.S.
investment bank, has retooled itself since the financial crisis. It
now earns more revenues from brokerage and asset management than
traditional investment banking businesses like underwriting stock
offerings and trading bonds.
Its shares rose 4.5 percent to $33.46.
"We've said pretty consistently we're one step at a time management
team," Chief Executive James Gorman said on a conference call, to
explain gradual updates to the bank's strategic plan. Three years
ago, he said, Morgan Stanley's return on equity was roughly 2
percent, and has since risen to 5 percent and then 7 percent, with a
current goal of 10 percent.
The investment banking businesses, particularly bond trading, were a
drag on results in the quarter, and helped pull down Morgan
Stanley's profit. Net income for common shareholders in the fourth
quarter fell to $133 million, or 7 cents a share, from $568 million,
or 29 cents, in the same quarter in 2012.
Excluding items such as $1.2 billion in legal expenses, the bank
earned 50 cents per share, according to Thomson Reuters I/B/E/S,
beating the average analyst estimate of 45 cents.
The retail brokerage business generated $3.73 billion in revenue in
the quarter, up from $3.33 billion a year earlier.
Income from the business rose, helped by its purchase of the 35
percent of the retail business it did not own from Citigroup Inc,
its joint venture partner, in mid-2013. All of the income from the
unit now goes to Morgan Stanley.
After coming close to failure during the financial crisis, Morgan
Stanley beefed up its retail brokerage business by agreeing to buy
Citigroup's Smith Barney unit over several years. Brokers generate
relatively steady fees for the bank, and the business is much less
risky than areas like bond trading, where bad bets hobbled Morgan
Stanley in 2008.
In the fourth quarter, the unit delivered a pretax margin of 19
percent, or 20 percent excluding a charge. Results were helped by
positive inflows and higher commissions, as well as rising markets.
Morgan Stanley raised its margin targets to a range of 22 percent to
25 percent by the fourth quarter of 2015, from a prior 20 percent to
22 percent.
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The increased forecast is a positive, but Morgan Stanley's wealth
business has lagged major rivals on the measure. Bank of America
Corp's wealth business delivered a pretax margin of 26.6 percent in
the quarter.
Revenue at Morgan Stanley's investment management unit jumped 41
percent to $842 million.
TOUGH FOR INVESTMENT BANKING
Morgan Stanley's investment banking performance was more mixed. Bond
trading revenue fell 14 percent to $694 million, excluding an
accounting adjustment.
Revenue from fixed income and related businesses like commodities
trading have been hurt across Wall Street by falling bond prices,
which weigh on client volume. Citigroup and Goldman Sachs Group Inc
posted similar declines in revenue, but Bank of America and JPMorgan
Chase & Co managed to boost their bond trading revenue.
Speaking on a conference call with analysts, Chief Financial Officer
Ruth Porat said the bond trading business was hurt by "rates"
products, which typically include U.S. government debt and other
bonds with interest-rate risk but little credit risk.
As with most Wall Street banks, the equities market was a bright
spot for Morgan Stanley in the latest quarter.
Equities trading revenue rose to $1.5 billion from $1.4 billion,
while equity underwriting revenue rose 75 percent to $416 million on
an increase in both initial public offerings and secondary stock
offerings.
(Reporting by Lauren Tara LaCapra in New York and Tanya Agrawal in
Bangalore; editing by Dan Wilchins, Ted Kerr and Jeffrey Benkoe)
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