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Morgan Stanley Profit Beats Estimates on Trading Revenue

Morgan Stanley, owner of the world’s biggest brokerage, reported second-quarter earnings that beat analysts’ estimates on higher trading revenue.

Net income rose to $1.96 billion, or $1.09 a share, from $149 million, or a loss of $1.10 a share, in the second quarter of 2009, the New York-based company said today in a statement. Earnings from continuing operations were 80 cents a share, which included a 20-cent tax benefit, compared with the 47-cent average estimate of 21 analysts surveyed by Bloomberg.

Chief Executive Officer James Gorman is trying to reduce the firm’s reliance on trading after Morgan Stanley suffered losses during the financial crisis. The company followed banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. in reporting a drop in trading revenue from the first quarter as volatility increased and markets fell.

“They’ve got the consistent piece from the retail and asset-management side to offset the variability which always comes from trading,” Douglas Ciocca, managing director at Renaissance Financial Corp. in Leawood, Kansas, which oversees about $2 billion in assets, said before earnings were released.

Goldman Sachs yesterday reported earnings that missed analysts’ estimates as fixed-income trading revenue fell 40 percent from the first quarter. Bank of America Corp. and JPMorgan Chase & Co., the two biggest U.S. banks by assets, last week both reported at least a 35 percent drop in fixed-income trading revenue.

Financial Reform

Morgan Stanley’s profit may be affected by the financial reform bill that President Barack Obama is scheduled to sign into law today. The bill, which the Senate passed last week after more than a year of negotiations, strengthens oversight of derivatives trading and limits proprietary trading and banks’ investments in private equity and hedge funds.

“One of the things that investors are going to wrestle with is what is the ultimate profitability of investment banking” after the government puts new financial regulations in place, said Kenneth Crawford, a senior portfolio manager at Argent Capital Management LLC in St. Louis, which manages about $900 million. “There will be surprises up the road as companies assess what happens to their profitability and what is their ability to offset some of those lost profits.”

Morgan Stanley’s revenue benefitted from gains related to the widening of the firm’s own credit spreads. The company booked $5.1 billion of gains in fiscal 2008 as its bond spreads widened, then reversed them in 2009 as markets improved and spreads tightened.

Van Kampen

The firm also had a gain from the sale of its retail investment-management business, including its Van Kampen funds, to Invesco Ltd. The $1.37 billion purchase, which was announced last year, was completed on June 1. Results included a charge related to the U.K. bonus tax.

Sixteen analysts cut their per-share earnings estimates in the past four weeks, with many citing volatile financial market conditions. The Standard & Poor’s 500 Index dropped 8.2 percent in May and another 5.4 percent in June. The average earnings estimate fell 19 cents in the past four weeks.

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 Brothers Holdings Inc.’s bankruptcy.

Asset Management

Morgan Stanley has since altered its business model to rely less on trading and more on global wealth management and asset management. The firm paid $2.75 billion last year 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 company is building a private bank to offer more products such as jumbo mortgages and structured loans to Morgan Stanley Smith Barney clients. It has hired 100 bankers for the new unit and may quintuple their numbers by the end of 2011, a person with knowledge of the strategy said last month.

The firm was the second-ranked adviser on announced mergers and acquisitions in the first half of the year, according to data compiled by Bloomberg.

Morgan Stanley and JPMorgan won the lead roles for General Motors Co.’s initial public offering, which may be worth as much as $12 billion, making it the second-largest IPO in a decade.

The bank was also the third-ranked underwriter of global equity offerings and the eighth-ranked underwriter of U.S. bonds in the first half, according to data compiled by Bloomberg.

Morgan Stanley rose 1.8 percent to $25.22 in yesterday’s New York Stock Exchange composite trading. The stock, which gained 85 percent in 2009, was down 15 percent this year through yesterday, and is still below where it traded before Lehman Brothers collapsed.