Morgan Stanley posted stronger-than-expected quarterly revenue and retail brokerage profit jumped, validating the bank's strategy of bolstering businesses that are less threatened by tougher regulation after the financial crisis.
While fourth-quarter profit fell short of forecasts, investors focused on the bank's stronger results in areas like asset management. Morgan Stanley shares rose 3.6 percent.
In 2009, after the financial crisis brought the bank to the brink of failure, Morgan Stanley began reducing its reliance on trading and risk-taking for profit.
It began concentrating instead on areas like wealth management, where revenue is more stable. As part of that move, it bought a controlling stake in Citigroup's retail brokerage business, now a joint venture known as Morgan Stanley Smith Barney.
Those moves seem to be paying off for Chief Executive James Gorman, who was originally hired by Morgan Stanley to oversee the bank's retail brokerage business.
Morgan Stanley Smith Barney generated about 20 percent of the bank's profit in the latest quarter.
Asset management, a business that was long a weak performer, has turned around under Greg Fleming, who joined Morgan Stanley in February 2010 and is now set to oversee retail brokerage, too. Asset management's revenue rose 68 percent from a year earlier, and the business generated about 20 percent of the bank's income.
Morgan Stanley's diversification stands in contrast to rival Goldman Sachs Group Inc , which generated about 82 percent of its fourth-quarter revenue from investment banking. Goldman shares fell 4.7 percent after the bank posted disappointing quarterly results on Wednesday.
"(Morgan Stanley is) starting to look a little clever with these more stable revenue businesses," said Adrian Cronje, chief investment officer at Atlanta-based Balentine, a wealth management firm.
EARNINGS MISS
Still, excluding $668 million of pretax gains from the sale of its investment in China International Capital Corp, Morgan Stanley's earnings fell short of analysts' expectations.
The second-largest U.S. investment bank said shareholder profit was $600 million, or 41 cents a share, up from $376 million, or 29 cents a share, a year earlier.
Adjusted earnings were 26 cents a share, below analysts' average forecast of 35 cents, according to Thomson Reuters I/B/E/S.
Investors looked past profits, though, and focused on Morgan Stanley's potentially better positioning for a world of tougher financial regulation.
New laws in the United States and abroad threaten to reduce the profitability of many banking businesses. Derivatives trading, for example, is expected to move mainly to exchanges, which will reduce profit for banks that used to match up buyers and sellers themselves. And capital rules may make it harder for dealers to fund as many client trades, which could permanently reduce trading volume.
Bank executives have expressed some optimism about the outlook for trading.
"Clearly, there have been some structural changes in certain parts of the markets. The real question is, are they permanent, are they temporary," David Viniar, chief financial officer at Goldman Sachs, said on a Wednesday conference call. "I don't happen to believe most things are permanent."
But when asked about expectations for the future, Jamie Dimon, chief executive of JPMorgan Chase & Co
"You can have a very good year in trading ... this year, but your guess is as good as my guess, so use your own," Dimon said on a conference call with analysts last week.
Morgan Stanley posted fourth-quarter revenue of $7.81 billion, topping the average Wall Street forecast of $7.35 billion.
The bank's shares were up 99 cents to $28.74 on the New York Stock Exchange.
TRADING
"The Morgan Stanley results are a mixed bag. There's some good news, but trading revenue is down. That's been a problem across Wall Street," said David Carter, chief investment officer at Lenox Advisors in New York.
The bank suffered from the same trading malaise that hit JPMorgan, Goldman Sachs and Citigroup Inc. Morgan Stanley's overall trading revenue fell 38 percent, and it lost money in fixed-income trading.
"This market was a tough market," Ruth Porat, chief financial officer, told Reuters in an interview.
Morgan Stanley hopes trading volumes will improve as the global economy improves, and hopes it can boost market share, she said.
On a conference call, Chief Executive James Gorman said the bank has more work to do in fixed income. Morgan Stanley hired hundreds of traders over the past year as part of a multiyear effort to boost its bond trading business, which is small relative to rivals.
The bank earlier this month said Jack DiMaio, global head of interest-rate, currency and commodity trading, was leaving, and that chief risk officer Kenneth deRegt was becoming global head of fixed income sales and trading.
Morgan Stanley Smith Barney generated income for Morgan Stanley of $166 million in the fourth quarter, up from $29 million a year earlier. Morgan Stanley holds a 51 percent stake in the joint venture.
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