Morgan Stanley’s Profits Rise Up

Morgan Stanley, driven by its trading and investment banking divisions, reported a robust second quarter today with a 41 percent increase in net earnings.

The results, which surpassed analyst estimates and set a record for the firm, were a vivid demonstration of the investment bank’s ability to overcome the subprime problems that have plagued its rivals.

Like other banks on Wall Street, Morgan Stanley has recently invested money building up its subprime operations, but the performance of its institutional securities division has tempered any effect from the market shake-out.

David H. Sidwell, Morgan Stanley’s chief financial officer, attributed this success to the fact that the firm had less exposure to the market for originating mortgages than peers like Bear Stearns.

The institutional securities business, which includes trading and investment banking, has traditionally been the firm’s engine, even more so after the spinoff of Discover.

Fixed-income trading and sales revenue were up 39 percent compared with the period last year, propelled by strong results in currency trading and emerging markets. Equity trading was also strong, up 33 percent in a climbing stock market.

“We had a very strong client flows,” said Mr. Sidwell. “Prime brokerage was also strong due to activity from hedge fund clients.”

Advisory revenue, helped by a robust deal making environment, were up 99 percent compared with the period a year earlier.

Morgan Stanley’s traders and investment bankers seem clearly to be responding to a mandate by the chief executive, John J. Mack, to take on more risk. The firm’s value at risk, a key barometer that measures the firm’s exposure to possible trading losses, was $87 million, up from $70 million in the period last year, although down a bit from the first quarter.

The firm’s brokerage division showed a sharp increase; pretax income increased 67 percent compared with the period in the previous year. Under James P. Gorman, its new head, this area of the firm continues to show progress, with margins increasing to 16 percent, from 12 percent last year.

In asset management, where Mr. Mack has been making aggressive investments to compensate for past years of weakness, pretax income grew by 16 percent, although margins were down from last year.

For the quarter, net earnings were $2.6 billion, and diluted earnings were a record $2.45 a share, up from $1.74 a share a year ago. Morgan Stanley’s stock rose 9 cents, to $87.89.

source:www.nytimes.com