Morgan Stanley Earnings Top Estimates, Aided by Accounting

Morgan Stanleyreported earnings for the quarter of $1.14 per share that easily outdistanced Wall Street expectations, though much the beat was due to an accounting move that also has helped its peers.

Morgan Stanley
Oliver P. Quillia for
Morgan Stanley

The Wall Street banking titan reported income of $2.2 billion. The accounting move that allowed the company to push credit spreads out — known as debit value adjustment —accounted for a $3.4 billion revenue boost.

Analysts had been looking for profit of 30 cents a share.

Core revenue in trading, banking and wealth management operations fell.

Investment banking revenues were $864 million, while sales and trading net revenues came in at $5.4 billion, which included the $3.4 billion in positive DVA.

Morgan Stanley shares were volatile in morning trading but eventually turned positive, a trading pattern that has reflected other banks reporting thus far.

The DVA accounting move also has helped several of Morgan's big Wall Street peers, particularly Bank of America , Goldman Sachs and JPMorgan Chase.

Though traders were unimpressed with the earnings report, company CEO James P. Gorman said in a statement the firm is "well positioned to deliver for clients in the long term."

Morgan Stanley's results also reflected cost cuts, a more profitable wealth management business, and what top executives characterized as market-share gains with trading clients.

In an interview with Reuters, Chief Financial Officer Ruth Porat said the No. 2 U.S. investment bank does not try to hedge its debt valuation adjustment, which accounted for the big accounting gain.

"When you look at credit spreads or CDS and it's inconsistent with the strength we're seeing in our business ... of course it's frustrating," said Porat.

The bank's bonds weakened significantly against U.S. Treasurys during the quarter as investors worried about its exposure to troubled European countries and banks. This allowed the bank to record an accounting gain because it could theoretically profit from buying back debt.

In its earnings report, Morgan Stanley said its gross exposure to Greece, Ireland, Italy, Spain and Portugal was $5.69 billion at Sept. 30, or $2.1 billion including hedges, while the bank's equity, a measure of its net worth as a company, was about $60 billion.

The bank said its exposure to France at Sept. 30 was $1.53 billion, or a negative $286 million including hedges. A report on the financial blog Zero Hedge on Sept. 22 pegged the bank's exposure to France at $39 billion at the end of 2010, which sparked fears about losses it might incur.

Morgan Stanley reported third-quarter earnings of $2.15 billion, or $1.15 per share, compared with a loss of 7 cents per share a year earlier. Revenue climbed 46 percent to $9.89 billion.

Excluding the DVA gain, it earned 2 cents per share.

Revenue from its trading business more than doubled from a year earlier and climbed 24 percent from the second quarter. The sharp increases reflect the DVA gain.

Asset management revenue of $215 million fell 73 percent from the year-ago period and 67 percent from the second quarter due to paper losses on principal investments in its merchant banking and real estate investing business.

—Reuters contributed to this report.