Coverage: Morgan Stanley’s earnings are a trading surprise

Morgan Stanley reported second quarter earnings Wednesday that soundly topped expectations, helped by an increase in stock trading revenues and profits from its wealth management business.

Evelyn Cheng of CNBC.com had the news:

Morgan Stanley’s markets revenue held up better than other big banks that reported this quarter.

Equity sales and trading net revenues increased by $100 million to $2.2 billion, little changed from a year ago but up 7 percent from the first quarter, “reflecting strong contributions across products and regions,” Morgan Stanely said in a statement.

Overall sales and trading revenue decreased by $100 million, or 2 percent, from a year ago, to $3.2 billion. Bond trading revenue fell $100 million, or 4 percent, to $1.2 billion in the second quarter, “driven by lower volatility and sporadic activity during the quarter,” the release said. Fixed income trading revenue was $1.7 billion in the first quarter.

The second quarter marked the second in a row for which Morgan Stanley’s fixed income trading revenue topped that of Goldman Sachs.

On Tuesday, Goldman reported fixed income, currency and commodities trading net revenue dropped 40 percent from the second quarter of 2016 to $1.16 billion, down from $1.69 billion the prior quarter.

Olivia Oran and Sruthi Shankar of Reuters reported that bond trading was a sore spot:

The one dark spot, bond trading, fell 4 percent, much less than at Wall Street rivals that reported earnings in recent days. The $1.3 billion in revenue from that business topped Chief Executive Officer James Gorman’s $1 billion quarterly target and beat Goldman’s $1.2 billion.

Morgan Stanley shares jumped 3.9 percent to $46.95 in morning trading.

“We think we’ve made the right decisions and the results over the last five quarters in a row show we’re credible and critically sized” in bond trading, Chief Financial Officer Jonathan Pruzan said in an interview.

For years, Morgan Stanley struggled to convince Wall Street that its plan to remain a major player in trading while growing wealth management was going to succeed. Its results were choppy following the 2007-2009 financial crisis, and it took time for pieces of Gorman’s plan to fall into place.

But lately the bank has been hitting or exceeding targets Gorman laid out.

Gillian Tan of Bloomberg Gadfly noted that investors liked the news:

This time last year, James Gorman, the bank’s chairman and CEO, deemed it too early to take a celebratory victory lap over its decision to reorganize its fixed-income trading business (a move it made after shifting its focus toward wealth management). Back then, the unit’s revival showed early signs of health through its delivery of more than $1 billion in revenue. A recent Wall Street Journal profile of Morgan Stanley’s trading chief Ted Pick reiterated the bank’s hesitance to celebrate its burgeoning success: he had been telling associates that the division was “operating with ‘omentum’— that is, momentum with an ‘m’ so small it is invisible.”

It’s nice to be humble, but the numbers paint another picture. Morgan Stanley’s latest results show the bank blew through $1 billion in fixed-income trading revenue for the fifth consecutive quarter. In doing so, it’s been able to better the results of close rival Goldman Sachs Group Inc. for a second straight period.

Morgan Stanley’s ability to displace its stalwart rival, in part by taking on more risk, isn’t going unnoticed. Even though executives will likely continue to play it down, they’ve earned the right to some out-of-the-spotlight high-fives and pats on the back.

It’s easy to see why investors are so upbeat: Although there is room for improvement, the bank’s return on equity, a key profitability measure, is finally more dependable and once again within management’s targeted range. (This quarter it even bested …you guessed it, Goldman Sachs).