Morgan Stanley beats estimates as record deal-making cushions trading blow

By Sohini Podder and Elizabeth Dilts Marshall

(Reuters) -Morgan Stanley beat expectations for quarterly profit on Thursday, as the Wall Street bank got a boost from record investment banking activity even as the trading bonanza that supported results in recent quarters slowed down.

Executives offered an optimistic outlook, saying clients were eager to get deals done toward the end of the second quarter, an encouraging sign that advisory revenue could rise further.

"We ended the quarter with momentum," said Chief Financial Officer Sharon Yeshaya.

Trading revenue was a sore spot across Wall Street last quarter, given comparisons to a blockbuster year-ago period when the coronavirus pandemic caused wild volatility, especially in fixed-income markets.

Bank executives have repeatedly said that trading volumes would eventually return to normal, and that began to happen last quarter.

Morgan Stanley (NYSE:MS)'s fixed-income trading revenue fell 45% from the year-ago period. Equity trading revenue was up 8%.

Morgan Stanley needs to increase its market share in bond trading to grow revenue, Chief Executive James Gorman said on a call with analysts. Nonetheless, the business is beating internal targets.

"Our aspiration years ago was to do $1 billion a quarter," he said. "And here we are in a sort of so-so quarter at $1.7 billion."

"As rates normalize and as the fixed income fee pool will inevitably grow, I see a lot of space there," he added.

Overall, Morgan Stanley's profit rose 12% to $3.4 billion, or $1.85 per share, from $3 billion, or $1.96 per share, in the year-ago period. The per-share figure dropped because Morgan Stanley had more common shares outstanding.

Its results beat analysts' estimate of $1.65 per share, on average, according to IBES data from Refinitiv.

Net revenue rose to $14.8 billion from $13.9 billion.

Morgan Stanley's institutional securities division, which houses trading and investment banking, saw revenue fall nearly 14% to $7.1 billion, due to the downturn in fixed-income activity.Similarly, Morgan Stanley's chief rival, Goldman Sachs Group Inc (NYSE:GS), reported a 32% decline in revenue for its similar division, while JPMorgan Chase & Co (NYSE:JPM), the largest U.S. bank, also suffered declines in trading. [L4N2OP27H]

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However, Morgan Stanley enjoyed gains from a surge in deal-making activity in the first half of the year that smashed all-time records, with over 28,000 deals totaling volumes of over $2.82 trillion being announced between January and June, according to data from Refinitiv. Investment banking revenue rose 16% at Morgan Stanley to $2.38 billion, largely driven by gains from advising on deals and equity underwriting. The bank, which advised on 216 deals in the first six months of the year, ranked third in the global M&A league tables during the quarter, behind Goldman Sachs and JPMorgan, according to Refinitiv. Return on tangible common equity excluding integration related expenses came in at 19% in the quarter, well above the bank's two-year target of between 14% and 16% set in January. The metric measures how well a bank is using its capital to produce profit. Morgan Stanley shares were up 1.4% at $93.77 in midday trading.