Morgan Stanleystunned investors with better-than-expected second-quarter results, outperforming Goldman Sachs and other rivals as it gained market share in tough trading conditions.
The bottom line was helped by strong equity and sales trading, surprisingly resilient fixed income, currency and commodities (FICC) trading, and a lead underwriting position on several big technology IPOs.
Morgan Stanley shares were last trading up more than 5 percent on the New York Stock Exchange. Get real-time quotes for Morgan Stanley here.
Asked about the market's reaction to the bank's results, Chief Financial Officer Ruth Porat told Reuters, "I like that phrase 'knock-the-socks-off results.' We're pleased in particular because it's the breadth across the businesses."
The bank reported a quarterly loss of 38 cents per share, weighed down by a big one-time charge and a weak trading environment that swept across Wall Street.
But the loss was much smaller than analysts expected. The average Wall Street forecast was a loss of 62 cents a share, according to Thomson Reuters.
The loss included a charge of $1.02 per share and a dilution of the bank's share base from the conversion of a $7.8 billion preferred stock investment by Japan's Mitsubishi UFJ Financial Group. The conversion allows Morgan Stanley to avoid expensive dividends to the Japanese bank in the future.
In FICC, a traditionally lucrative area that has come under pressure in recent quarters, Morgan Stanley's revenue dropped just 9 percent to $2.1 billion. Chief rival Goldman Sachs Group reported a stunning 53 percent decline in that area on Tuesday.
"Morgan Stanley is the new Goldman Sachs," said Richard Bove, a bank analyst at the brokerage Rochdale Securities. "Every one of their divisions shows an improvement, and the improvement in trading operations is especially impressive."
Chief Executive James Gorman has been on an aggressive campaign to increase market share in FICC trading, trying to woo clients away from competitors and getting existing customers to trade more on Morgan Stanley's platform. He reinstalled Ken deRegt, a former head of FICC trading, back into that position in January to revitalize the business.
Porat said the bank's management is not yet thrilled with its FICC performance, since it is still coming from a small base. "It's progress against a level that we thought was too low for this franchise," she said.
In a rare symmetry, both net revenue and total noninterest expenses at the company grew 17 percent from a year earlier, signaling that Morgan Stanley is keeping its cost growth in check.
Compensation, traditionally the biggest part of an investment bank's expenses, totaled $4.7 billion, or 50 percent of Morgan Stanley's net revenue. That compares with 57 percent in the first quarter and 49 percent a year earlier.
Second-quarter results were boosted by a strong increase in equity sales and trading revenue, up by more than a third from a year ago at $1.9 billion. Investment banking revenue surged 57 percent to $1.7 billion.
Revenues in another key division, wealth management, rose 13 percent, and earnings in that segment rose by almost two-thirds. Morgan Stanley is in the process of acquiring the giant Smith Barney wealth management franchise from Citigroup Inc , and the business now contributes about one-third of its revenue.
Gorman has targeted a pretax operating margin of 20 percent for the business, but high costs have kept profits in check. The wealth management business posted a 9 percent margin in the second quarter.
Porat said management is pleased with the integration of the wealth management business so far but is cutting lower-performing financial advisers in an effort to trim costs and boost profits. At the end of June, the bank's brokerage force stood at 17,638, down from 18,087 a year earlier.
An earlier version of this story said that the bank's brokerage force was at 18,087 at the end of the first quarter. In fact, that was the level from the year-earlier period.