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Morgan Stanley beats expectations on bond trading and cost cuts

Posted by: Admin | Posted on: July 20th, 2016 | 0 Comments

Morgan Stanley (MS.N) reported a lower second-quarter profit on Wednesday, but beat expectations by delivering relatively strong bond-trading revenue and cutting expenses.

The Wall Street bank’s net income attributable to common shareholders was $1.43 billion, or 75 cents per share, in the quarter ended June 30, compared with an adjusted $1.69 billion, or 79 cents per share, a year earlier.

Analysts on average had expected earnings of 59 cents per share in the latest quarter, according to Thomson Reuters I/B/E/S.

After adopting a new accounting method, Morgan Stanley’s earnings no longer reflect changes in the value of its own debt. Adjustments for the year-ago period make the figures comparable.

Morgan Stanley’s shares were up 3.5 percent at $29.18 in premarket trading.

Morgan Stanley has been working to transform its bond-trading business into one that focuses on transactions that require little capital under new regulations. It has scaled back in areas like physical commodities – cutting headcount by about 25 percent – and emphasized more commoditized products, like interest rate swaps.

But for years the bank has struggled with volatile results in the business. In the second quarter, it produced $1.30 billion in adjusted revenue from fixed income, currency and commodities trading (FICC), up 2.4 percent from the same period a year ago.

Chief Executive James Gorman recently set out a target for Morgan Stanley to deliver at least $1 billion worth of quarterly revenue from the business. So far this year, it’s meeting that goal.

Morgan Stanley’s equities trading business, which has been strong in recent years, reported $2.15 billion in adjusted revenue, a 5.5 percent decline from the year-earlier quarter.

Other Wall Street banks that have reported results so far, including JPMorgan Chase Co (JPM.N), Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Goldman Sachs Group Inc (GS.N) have also reported better results from bond trading than from equities.

Morgan Stanley is in the midst of a $1-billion cost cutting program. The bank said total non-interest expenses fell 8.4 percent to $6.43 billion in the quarter. Compensation costs, its biggest expense, fell 8.9 percent to $4.02 billion.

As part of its cost-cutting effort, Morgan Stanley cut nonessential travel by half, Chief Financial Officer Jon Pruzan said on a conference call. It is also closing data centers and shifting employees to lower-cost hubs.

Following the results, Evercore ISI analyst Glenn Schorr issued a report cheekily titled “Morgan Stanley Beats on FICC (not a typo) Cost Control.”

However, Morgan Stanley is still falling short when it comes to a key measure of how well it’s using shareholder money to produce profits. Its return on equity of 8.3 percent during the second quarter is less than the 10 percent minimum that many investors expect, and less than Gorman’s stated target of 9 to 11 percent by the end of 2017.

Up to Tuesday’s close, the bank’s shares had fallen 11.4 percent since the start of the year.

(Reporting By Sudarshan Varadhan in Bengaluru; Writing by Lauren Tara LaCapra; Editing by Ted Kerr and Nick Zieminski)

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