Morgan Stanley posts first profit for 2009

Third-quarter earnings beat expectations but trail major rivals

NEW YORK -- Morgan Stanley on Wednesday reported better-than-expected earnings of $757 million from July to September, posting its first quarterly profit this year.

The profit translates to earnings of 38 cents per share, topping analysts' estimates of about 30 cents. Morgan Stanley, which has lagged behind competitors such as Goldman Sachs in emerging from the financial crisis, was helped by rebounding markets that boosted its investment banking fees as well as increased risk-taking in trading, analysts said. Goldman last week said it earned $3.19 billion during the third quarter.

Morgan Stanley's revenue for the quarter was $8.7 billion, down from $18 billion from the same period a year ago, the last quarterly profit for the bank before it began reporting a string of losses. The firm earned $7.7 billion in the year-ago quarter, but the results were boosted by a one-time gain.

The company received $10 billion from the government at the height of the financial crisis but repaid that aid in June.

Morgan Stanley's rivals have pulled ahead on profits from trading in stocks, bonds and other financial instruments. While the Morgan Stanley said its revenues from such fees were strong for the quarter, it also acknowledged continued weakness in trading.

"Although we still have work to do in sales and trading, it offers our single biggest opportunity for growth as we build out our client flow business and pursue disciplined risk-taking," said John Mack, Morgan Stanley's outgoing chief executive.

Nonetheless, the appetite for risk inched up during the quarter. Value-at-risk, a measure of how much the bank estimates it could lose in a single day of trading, rose to $118 million, an increase of 4 percent from the previous quarter and 23 percent from a year ago. Colm Kelleher, Morgan Stanley's chief financial officer, suggested in an interview that measure could go higher in the future, if it makes sense to do so.

The company is mindful, Kelleher said, of moves in Washington to overhaul financial regulation. Kelleher foresees "significantly" higher capital and liquidity requirements, and that, he said, is one of the reasons why the bank is holding substantially more capital than is required under current rules.

"The biggest risk we face is the regulatory tail risk, justifiably so given what our industry did in the previous year," he said.

In a conference call with analysts, Kelleher said that the outlook for the global economy and market conditions was one of improvement. Such recovery has helped Morgan Stanley collect more fees from helping companies issue stock and raise funds.

Responding to a question about continued comparisons to perennial rival Goldman Sachs, Kelleher said he'd prefer to be "the tortoise rather than the hare."

"Morgan Stanley survived, and it's now starting to thrive," said Gerard Cassidy, an industry analyst with RBC Capital Markets. "It's tough when you have Goldman Sachs as your comparison."

Separately, Wells Fargo, another major bank that received government aid, said it earned $2.6 billion in the third quarter, up from $1.64 billion a year earlier, as its commercial banking business helped offset increased loan losses. Wells Fargo has not yet repaid the $25 billion it received from the government.