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Morgan Stanley (MS-N) won market share in bond trading in the first quarter after years of investments in the business, allowing the investment bank to post results that beat many analysts' expectations.
The investment bank and brokerage said its adjusted bond trading revenue rose compared with last year's first quarter, even as competitors posted declines. Morgan Stanley shares were up 3.3 percent to $18.24 US in Thursday morning trading.
"We had identified several years ago that we were punching below our weight in fixed income products," Chief Financial Officer Ruth Porat said in an interview. "I think you're beginning to see the fruits of all we've done here."
Still, the bank lost money during the first quarter because an accounting adjustment cost it $2 billion.
The Wall Street investment bank reported a net loss of $119 million, or 6 cents per share, compared with a profit of $736 million, or 50 cents per share, in the year-ago quarter.
Excluding the accounting item, known as debt valuation adjustment -- which requires companies to record gains when their own debt weakens and losses when their debt strengthens -- the bank earned $1.4 billion, or 71 cents per share.
Net revenue totaled $6.9 billion. Excluding the debt adjustment, revenue was $8.9 billion, up from $7.8 billion a year earlier.
"The revenue is a good solid number," said Wojtek Zarzycki, chief investment officer of Optimal Investing in Toronto. "It is a pleasant surprise here."
Excluding debt adjustments, Morgan Stanley's trading revenue rose 33 percent to $5 billion. Pretax income from trading, excluding DVA, more than doubled, to $1.67 billion from $621 million.
Much of the increased client activity in bond trading came as a result of the European Central Bank's Long Term Refinancing Operation (LTRO), announced in December, Porat said. The LTRO offered a lifeline to struggling European banks, easing investor concerns about the European debt crisis and creating less-volatile trading conditions.
"We've had thousands of investors literally on some of our weekend calls trying to understand what's going on in the Eurozone," Porat said.
Morgan Stanley profited by advising clients on how to hedge risk related to Europe, particularly in foreign exchange, and by executing those trades, she said.
The investment bank also showed progress in its wealth-management business, which investors and analysts have been watching closely because Morgan Stanley has been slow to hit targets related to the integration of its Morgan Stanley Smith Barney joint venture with Citigroup Inc.
Morgan Stanley's global wealth management business, which includes the joint venture, reported net revenue of $3.4 billion, with a pretax profit margin of 11 percent, up from a year ago and from the previous quarter.
Management initially targeted a pretax margin of 20 percent but lowered that target to mid-teens last year, saying low interest rates and weak client activity were hurting performance.
The business reported more client assets in fee-based accounts and more revenue and assets per financial adviser. Some of those gains are the result of Morgan Stanley's effort to fire hundreds of unproductive advisers. Its financial adviser headcount was 17,193 at March 31, down 2 percent from the end of the fourth quarter and down 5 percent from a year earlier.
Morgan Stanley plans to complete a technology integration this summer that will put all of the financial advisers on the same platform, an effort that will save the bank an estimated $500 million a year.