JANUARY 21, 2011.

Morgan Stanley Profit Jumps 35%


By BRETT PHILBIN

NEW YORK—Morgan Stanley's fourth-quarter profit rose 35% as revenue climbed across its investment banking, wealth and asset management businesses from a year ago. Company executives were cautiously optimistic for 2011.

Recovery Is Not Enough to Bump Up Bonuses at Citigroup Access thousands of business sources not available on the free web. Learn More The company, which is shifting its balance sheet away from proprietary operations to focus on client businesses, said revenue in institutional securities, which includes investment banking and sales and trading, rose to $3.6 billion, up 12% from a year ago.

The fourth-quarter results, in general, reflect improved performance for the firm, which is beginning its second year under Chief Executive James Gorman. Morgan Stanley, whose overall results were sluggish in 2010, still needs to string together consecutive strong quarters, specifically in its trading business, which has lagged behind rivals in areas such as fixed income.

Shares were up 4.7% at $29.06. They are down about 5% in the past year.


James Gorman
.Overall, Morgan Stanley reported a profit of $836 million, up from $617 million a year earlier. Including preferred dividends, earnings jumped to 41 cents a share from 29 cents.

Net revenue jumped 14% to $7.81 billion.

Analysts polled by Thomson Reuters had forecast earnings of 35 cents a share on $7.35 billion in revenue. Not all analysts included in their estimates a 17-cent gain from the company's sale of its investment in Chinese investment bank China International Capital Corp.

Investment banking revenue climbed to $1.8 billion, up 5% from a year earlier and up 44% from the third quarter.

During a conference call, Morgan Stanley Chief Financial Officer Ruth Porat said the firm is "encouraged by the pace of recovery" in capital markets activity and that the company's investment banking deal pipeline remains healthy globally.

However, she warned that macro-economic issues and further potential regulatory changes are risks.

Within wealth management, Morgan Stanley posted $14.1 billion in net new assets, as revenue from the segment, which is mostly a joint venture with Citigroup Inc.'s Smith Barney legacy operation, rose 7% to $3.4 billion. The unit's pre-tax profit margin also rose to 12%— its highest level since the deal closed more than a year ago. The firm has a goal of a 20% margin for the business.

In an interview, Ms. Porat said that following the May 6, 2010, "flash crash," investors came back to the market late in the summer and that trend continued into the fourth quarter.

Associated Press

Employee compensation jumped at the bank. Above, a Morgan Stanley billboard is displayed in Times Square, New York.
.She said Morgan Stanley "still has a lot of work to do," but said the improved performance across its business segments reflects opportunities for it to expand its market share.

Trading activity, however, fell, reflecting an industry-wide slowdown. Morgan Stanley's sales and trading unit posted $854 million in revenue,, down 27% from a year ago.

The fixed-income business reported trading losses of $29 million, compared with revenue of $663 million a year earlier.

Hurting the fixed-income result was $842 million in what the company described as "negative revenue," the result of an increase in the value of the bank's own debt, which theoretically made it more expensive to repurchase.

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.Ms. Porat said Morgan Stanley "isn't looking for a heroic move in the fixed income market," rather a more muted or predictable environment. Last week, Morgan Stanley named Chief Risk Officer Ken deRegt global head of fixed-income sales and trading--excluding commodities.

Mr. Gorman said the company's aggressive hiring of bankers and traders has ended while it waits to see the payoff from the investment. "These folks are getting traction," he said.

Excluding the impact of the Smith Barney joint venture, Morgan Stanley's compensation expense fell from a year ago.

Within Morgan's institutional securities group, compensation was $7.1 billion last year. Excluding a $269 million charge for a U.K. bonus tax, that was a 5.5% decline from 2009.

More of that pay, at the investment bank, was deferred. Some 60% of pay was subject to deferral last year, up from 40% in 2009. For the most senior employees, the proportion of deferred pay increased to more than 80%, from 75% in the prior year.

—Liz Moyer and Matt Jarzemsky contributed to this article
Corrections & Amplifications
Morgan Stanley's net income rose 35% in the fourth quarter. Morgan Stanley reported a profit of $836 million, up from $617 million a year earlier. A previous version of this article incorrectly stated that net income rose 88% in the quarter.

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