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Continuing the positive earnings surprise trend in the large cap banks, Morgan Stanley (NYSE:MS) today reported its performance for the third quarter of the current year. The bank reported income from continuing operations at $0.28 per share against consensus mean expectations of $0.24 income per share. The positive surprise of 17% occurred on a 19% positive surprise as far as the reported revenues are concerned. The reported revenues of $7.6 billion exceeded its mean expectations by 19%. Considering the impact on onetime items, the bank reported a loss of $0.55 per share. Negative revenues of $2.3 billion related to changes in DVA/ CVA were part of the onetime items for the third quarter results.

The results of the third quarter of the current year were positively affected by an almost two-fold increase in revenues from fixed income trading. Revenues from fixed income trading climbed 89% from a year ago, which is the largest among peer large cap bank. Comparatively, revenues from fixed income trading surged 63% and 33% for Citigroup (NYSE:C) and JPMorgan (NYSE:JPM), respectively, when they reported their performances for the third quarter.

The bank reported a net loss of $956 million on revenues of $5.3 billion at the end of the third quarter of the current year. Revenues declined by 24% sequentially and 46% when compared to the same quarter of the previous year. Much of the decline was associated to the decline in non-interest income, on which the bank has a heavy reliance. Non-interest income of $5.4 billion that the bank generated during the third quarter remained 23% below when compared with the non-interest income of the linked quarter.

A decline in revenues from non-interest income occurred due to an 86% sequential decline in principal trading transactions to $314 million, and an 8% decline in commissions and fees. The bank relies heavily on non-interest income.

Overall, non-interest expense surged 21% sequentially and 11% YoY, largely due to a 27% sequential rise in non-compensations based expenses.

Segmental Review:

The largest contributor to Morgan Stanley's income is the Global Wealth Management Group segment, which generated revenues of $3.3 billion, relatively flat when compared to the linked quarter. The revenues were 3% above from a year ago. However, the pre-tax income from continuing operations of $239 million remained below revenues of $356 million from a year ago. The segment saw a 3% increase in asset management fees, while transactional revenues remained flat from a year ago. The segment was not able to curtail expense, which is why both compensations related and non-compensation related expenses increased from 5% and 13% from a year ago.

Unadjusted top line of $1.4 billion from Institutional Securities declined 57% sequentially and 79% when compared to the results of the same quarter of the previous year. In contrast, adjusted top line surged 26% from the linked quarter. The impact of the decline in revenues was translated in the pre-tax income, which declined from $508 million at the end of the second quarter to a loss of $1.9 billion at the end of the third quarter. Adjusted pre-tax income from the segment, however, surged over 100%.

Lower capital market volumes led to an advisory revenue decline of 18% from a year ago. Equity underwriting revenues were down 17%, while fixed income underwriting revenues surged 100% from a year ago. This reflects the bank's higher market share in investment grade debt and increased issuance volumes. Fixed income sales and trading revenues surged 36%, while equity sales and trading declined 7.6% YoY. Compensation and non-compensation expenses surged 6.6% and 22%, respectively.

Asset Management revenues advanced 38% sequentially. The impact of such a surge was translated into the segment's pre-tax income of $198 million, which increased from $43 million at the end of the second quarter of the current year. The surge in revenues was a result of solid growth in traditional asset management business and merchant banking.

The bank has a Tier 1 capital ratio of 16.7% and a Tier 1 common ratio of 13.7% at the end of the third quarter of the current year. Comparatively, JPMorgan had a Tier 1 capital ratio of 11.9% and a Tier 1 common ratio of 10.4% at the end of the third quarter.

In conclusion, the stock that has seen 21% price appreciation since the beginning of the year has beaten estimates largely on the growth in revenues related to fixed income. The bank has shown tremendous potential in gaining a market share in fixed income trading, as compared to the market share at the end of the second quarter of the current year. The trend of growth in fixed income was also witnessed in the results that JPMorgan and Citigroup reported for the most recent quarter.

Source: Morgan Stanley Beats, Just Like The Other Large Cap Banks