Morgan Stanley profit crushes estimates on trading strength

Morgan Stanley eased past Wall Street estimates for profit on Thursday, wrapping up mixed third-quarter earnings for big US banks that saw those focused on trading clocking big gains while retail banks took a hit from the pandemic.

Like fellow Wall Street trading powerhouse Goldman Sachs, Morgan Stanley capitalized on a flurry of activity in financial markets. Clients bought and sold securities in response to the coronavirus pandemic, and many companies went public or raised fresh capital.

While Morgan Stanley's trading unit did not hit the record highs of the previous quarter, the latest performance was still good enough to help the bank comfortably beat expectations.

Striking an upbeat tone about future growth, Chief Financial Officer Jonathan Pruzan said the bank was encouraged by client engagement across all its businesses in the first few weeks of the fourth quarter.

Even as trading returns to the spotlight amid the pandemic, Chief Executive James Gorman has been taking steps to shore up Morgan Stanley's asset and wealth management businesses to insulate the bank from weak periods for trading and investment banking.

Gorman engineered two large back-to-back acquisitions recently - a $7 billion deal to buy Eaton Vance Corp to expand its investment-management business immediately after closing its $13 billion acquisition of discount brokerage E*Trade Financial Corp. Executives said they are done with deals for awhile as they integrate those companies.

"We clearly have our plate full," Pruzan said in an interview.

Morgan Stanley shares rose 1.5% to $51.40 in afternoon trading.

The bank's wealth management arm also turned in a solid quarter with a 7% jump in revenue to $4.7 billion.

Its return on tangible common equity (ROTCE), a measure of how well a bank uses shareholder money to produce profits, came in at 15%, in line with the target Gorman had set out earlier this year.

In contrast to Morgan Stanley and Goldman Sachs, other big banks like JPMorgan Chase & Co, Citigroup, Bank of America and Wells Fargo & Co are more exposed to weak activity in the real economy, plus historically low interest rates. They have collectively set aside tens of billions of dollars' worth of provisions this year to cover bad loans.

Even so, most large banks beat profit estimates this quarter, partly due to muted expectations.

ANOTHER STRONG QUARTER

Revenue from Morgan Stanley's institutional securities division, which is houses its investment banking and trading businesses, rose 21% to $6.1 billion.

Equities underwriting revenue more than doubled to $874 million due to handsome fees from a number of high-profile initial public offerings such as Snowflake Inc, Royalty Pharma, KE Holdings Inc and Warner Music .

But revenue from underwriting bonds dropped from last year due to declines in loan issuances and muted dealmaking activity.

Net income applicable to common shareholders rose 26% to $2.60 billion in the quarter ended Sept. 30. Earnings per share rose to $1.66, compared with the average analyst estimate of $1.28 per share, according to IBES data from Refinitiv.

Revenue also comfortably beat estimates, rising 16% to $11.7 billion, as all three of its main businesses posted gains.