Morgan Stanley profit beats estimates on wealth, shares rise

By Tatiana Bautzer and Mehnaz Yasmin

(Reuters) – Morgan Stanley (NYSE:)’s profit beat estimates as growth in its wealth management business offset lower trading revenue in the second quarter, and executives expressed optimism about the economic environment.

Morgan Stanley shares rose more than 6%, shrugging off the 14% drop in profits. Excluding one-off items, Morgan Stanley earned $1.24 a share on revenue of $13.46 billion, comfortably beating estimates of $1.15 a share on $13.08 billion revenue, according to data from Refinitiv IBES.

“We ended the quarter overall in a better place, with a better tone,” CEO James Gorman said, after the period started with uncertainty over the banking crisis, geopolitical tension and the path of U.S. interest rates. “While we may not be quite at the end of rate increases, I believe we are very close to it,” he told analysts on a conference call.

The wealth management unit’s net revenue rose 16% to a record $6.7 billion for the quarter, and it gained almost $90 billion in new assets.

Those results helped smooth the drop in trading revenues as volatility declined. Fixed income revenue sank 31%, while equities fell 14%. Morgan Stanley’s earnings were also eroded by $300 million in severance costs after the bank laid off thousands of employees this year.

Revenue from investment banking was flat at $1.16 billion. The “results appear much better than feared in a challenging environment,” UBS analyst Brennan Hawken‎ wrote in a note.

INVESTMENT BANKING

While more subdued markets weighed on trading, the stabilizing market conditions had not yet spurred activity in capital markets, Chief Financial Officer Sharon Yeshaya said in a phone interview.

Still, “we expect investment banking to lead the recovery in the next quarter,” she said in an interview with Reuters. Mergers and acquisitions are picking up in some industries such as financials and energy, and the bank’s backlog of deals is growing, she later told analysts on a conference call. Investment banking revenue was flat compared to a year earlier.

Morgan Stanley’s stock was reacting well to the improved outlook for the rest of the year, said James Shanahan, an analyst at Edward Jones.

SUCCESSION

Gorman announced in May that he would step down within a year. Morgan Stanley’s board will focus on the selection Gorman’s successor at its summer and fall meetings, a person familiar with the situation told Reuters last month.

Among the three top candidates are Ted Pick, the company’s co-president who leads its investment banking and trading arm, and co-president Andy Saperstein, who runs wealth management.

Although the results of the business units have diverged, Gorman stressed their performance is not the only consideration for CEO selection.

Revenue from investment management, run by the third CEO candidate, Dan Simkowitz, slipped 2%.