Robust fixed income trading results launched Morgan Stanley (MS.N) to a better-than-expected first-quarter profit on Wednesday, sending its shares up.
With its quarterly profit, Morgan Stanley joined in a rally that began last week with strong results from JPMorgan Chase & Co (JPM.N) and continued with Goldman Sachs Group Inc's (GS.N) profit surge on Tuesday.
Morgan Stanley in 2009 lagged behind Goldman in the recovery from the financial crisis largely because Goldman's trading desks made out-sized profits while Morgan Stanley scaled back on risk.
Goldman continued its trading prowess in 2010 — but Morgan Stanley appeared to be cashing in as well. Morgan Stanley's first-quarter fixed income sales and trading revenues more than doubled to $2.7 billion from $1.2 billion a year ago.
The firm has shaken up management in its trading divisions, hiring hundreds of traders and salespeople in the second half of 2009.
"We've clearly benefited from a strong environment," said Ruth Porat, Morgan Stanley's recently appointed chief financial officer. "We are executing on our strategy."
Morgan Stanley reported net income of $1.4 billion, or 99 cents per share, versus a loss of $578 million, or 57 cents per share, a year earlier.
Net revenue was $9.1 billion.
Its shares were up 4 percent to $31.68 in morning trading.
MANAGEMENT SHAKE-UP
Morgan Stanley, which reported a yearly loss for 2009, is looking for a rebound year in 2010 under the leadership of new Chief Executive James Gorman. Gorman shuffled his leadership team as he took the helm of the firm at the start of the year from John Mack, who stayed on as chairman.
Among Gorman's first moves were changing leadership in the institutional securities and asset management ranks. Both moves appeared to be paying off in the first quarter.
Morgan Stanley's asset management division, which struggled after the financial crisis, reported pre-tax income from continuing operations of $173 million compared to a loss of $283 million a year ago.
"Gorman, along with Mack and the board, reducing (risk), they still were able to pull this one off in a way to give confidence that Gorman is already settling in and prospects are bright," said Michael Holland, founder of Holland & Co.
One of Gorman's chief tasks has been to lower Morgan Stanley's compensation ratio, which soared to 62 percent in 2009.
In the first quarter, Morgan Stanley set aside $2.2 billion for compensation, or 41 percent of revenues compared to 65 percent a year ago.
"We are very focused on driving that compensation ratio down," Porat said.
KEY BUSINESSES
Morgan Stanley is also in the process of integrating Morgan Stanley Smith Barney, the largest retail brokerage.
Morgan Stanley Smith Barney reported net new assets of $5.8 billion, compared to a loss $4.6 billion in the fourth quarter of 2009.
Porat said Morgan Stanley Smith Barney, a product of a joint venture with Citigroup Inc (C.N), "had a very strong performance in what we view as a challenging environment."
She said broker attrition was at a historic low in the quarter.
Investment banking results were weak in the first quarter as initial public offering and merger markets remained soft.
Revenues were $1.1 billion, up from $873 million a year ago, but down from $1.7 billion in the fourth quarter of 2009.
Shares of Morgan Stanley closed at $30.45 on Tuesday, up 3.01 percent.
Morgan Stanley's shares trade at about 1.1 times their book value, or their value based on the company's assets minus liabilities. That level is below Goldman's ratio of 1.3.
