Smith Barney deal helps boost Morgan Stanley earnings

Morgan Stanley, in its first profit report under Chief Executive Officer James Gorman, posted earnings that beat analysts' estimates as fixed-income trading revenue more than doubled from a year earlier.

Morgan Stanley, in its first profit report under Chief Executive Officer James Gorman, posted earnings that beat analysts’ estimates as fixed-income trading revenue more than doubled from a year earlier.

First-quarter net income was $1.78 billion, or 99 cents a share, compared with a loss of $177 million, or 57 cents, in the first quarter of 2009, the New York-based company said today in a statement. Earnings from continuing operations, including a 21-cent tax benefit, were $1.03 a share, compared with the 57- cent average estimate of 24 analysts surveyed by Bloomberg.

Gorman, who succeeded John Mack in January, said in a letter to shareholders last week he was “not satisfied” with 2009 results and the firm had hired more than 350 employees as part of a “revitalization” of the sales and trading business. Morgan Stanley’s fixed-income results follow record revenue from debt trading reported earlier this month by Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc.

“The beat both in revenues and in earnings is significant,” Michael Holland, whose New York-based fund Holland & Co. oversees about $4 billion in assets, said in a Bloomberg Radio interview with Tom Keene. “In the more normalized environment you do have them looking better.”

Morgan Stanley’s revenue from fixed-income sales and trading jumped to $2.7 billion in the quarter from $1.29 billion a year earlier. That beat estimates for $1.95 billion from Howard Chen at Credit Suisse Group AG and $2.04 billion from Keith Horowitz at Citigroup Inc.

Morgan Stanley rose to $31.45 at 8:11 a.m., from $30.45 at the close yesterday on the New York Stock Exchange. The stock, which advanced 85 percent in 2009, is still below where it traded before Lehman Brothers Holdings Inc. went bankrupt in September 2008.

Goldman Sachs reported fixed-income revenue of $7.39 billion yesterday. Bank of America and JPMorgan Chase, the two biggest U.S. banks by assets, both beat analysts’ earnings estimates last week as they posted fixed-income revenue of $5.52 billion and $5.46 billion, respectively.

Revenue at Morgan Stanley more than tripled to $9.08 billion. Book value per share climbed to $27.65 from $27.26 at the end of December.

Morgan Stanley generated $887 million in revenue from investment banking, up from $811 million a year earlier. The firm was the second-ranked adviser on completed mergers and acquisitions in the first quarter, according to data compiled by Bloomberg. It was the third-ranked underwriter of global equity offerings and seventh for U.S. bonds in the quarter.

Global wealth management posted pretax income of $278 million, compared with $119 million in the first quarter of 2009, as the unit benefited from the addition of Smith Barney. Asset management reported a pretax profit of $173 million, compared with a pretax loss of $283 million in the previous year’s first quarter.

Morgan Stanley recorded a $932 million loss on its $1.2 billion investment in Revel Entertainment Group LLC, the developer of an unfinished casino resort in Atlantic City, New Jersey. Morgan Stanley said earlier this month that it is looking to dispose of the investment.

The Revel loss was partly offset by a $775 million payment Morgan Stanley received from Discover Financial Services to resolve a legal dispute.

Morgan Stanley was the second-biggest U.S. securities firm before converting into a bank in September 2008, gaining the protection of the Federal Reserve in the wake of Lehman’s bankruptcy.

Morgan Stanley has since altered its business model to rely less on trading and more on global wealth management and asset management. In June, the firm paid $2.75 billion to win control of a joint venture with Citigroup Inc.’s Smith Barney that includes about 18,000 financial advisers, the biggest brokerage force in the U.S.

The shares fell 5.6 percent on April 16, as the SEC accused Goldman Sachs of failing to tell investors in a 2007 collateralized debt obligation that hedge fund Paulson & Co., which planned to bet against the CDO, played a part in selecting the underlying assets. Goldman Sachs has said the SEC’s case is “completely unfounded in law and fact” and that it plans to “vigorously contest” the case.

“I think everyone is a little leery of just how deep the SEC is going to dig after what they’re finding at Goldman,” said Doug Ciocca, who helps oversee about $1.9 billion in assets, including Morgan Stanley shares, as managing director at Leawood, Kansas-based Renaissance Financial Corp. “You wonder who’s going to be spared, but you have to believe that the SEC led with its strongest hand.”