Morgan Stanley Powers Through Coronavirus Recession With Higher Profit, Revenue

Morgan Stanley


MS 1.34%

on Thursday said its quarterly profit rose 25% from a year ago, another big U.S. bank to skate unscathed through the rockiest economy in years. Profit of $2.72 billion, or $1.66 a share, was higher than a year ago and beat analysts’ forecasts. Revenue rose 16% to $11.66 billion. Morgan Stanley rounded out third-quarter earnings reports from the nation’s big banks, which have weathered the pandemic better than many of the clients they serve. Each posted billions of dollars in profits—and three including Morgan Stanley saw their profits grow from a year ago—despite a deep recession and an economic outlook tied to the odds of a compromise in Washington.

Big changes afoot at Morgan Stanley haven’t yet shown up in its financial results. The firm struck two big deals this year, acquiring E*Trade Financial Corp. for $11 billion earlier this month and fund manager Eaton Vance Corp. in a $7 billion deal that is expected to close next year.

Together, the acquisitions will continue Morgan Stanley’s transformation under Chief Executive James Gorman away from its Wall Street roots by adding steadier revenue from managing other people’s money. One sign investors are buying the story: The firm’s market capitalization this week passed that of

Citigroup Inc.,

which has more than twice Morgan Stanley’s annual profit.

“For a decade now, we’ve been rebuilding Morgan Stanley from the depths of the crisis to a position to withstand whatever comes our way,” Mr. Gorman said Thursday. “Our performance this year has validated that approach.”

Shares rose 1.3%.

The biggest banks were buoyed mostly by their Wall Street arms, with trading revenue rising between 4% at

Bank of America Corp.

and 30% at JPMorgan Chase & Co. Underwriting fees boomed, too, as companies sold stock and debt to investors to refill their pandemic-hit coffers.

Morgan Stanley followed suit, reporting a 20% rise in trading revenue and a 118% rise in stock underwriting. It is a smaller player in debt placements and big commercial loans.

The firm’s return on tangible equity, a measure of how profitably it puts shareholders’ money to use, was 15% for the quarter, hitting a target Mr. Gorman set earlier this year, before the pandemic crushed the global economy.

Moody’s Investors Service upgraded the bank’s credit rating earlier this month, which would lower its borrowing costs and make its traders more competitive. The 2012 ratings downgrade was one of the darkest moments of Mr. Gorman’s tenure as CEO, and he has spent years lobbying to reverse it. “We clawed our way back,” Chief Financial Officer Jonathan Pruzan said in an interview.

With that longtime bugbear resolved, Mr. Gorman on Thursday returned to another: the billions of dollars of capital that Morgan Stanley is sitting on, over and above what it needs to meet federal soundness standards. All big U.S. banks are currently barred from buying back stock and their dividends are capped, as regulators await signs that the worst of the recession has passed. That means that capital stash will only grow as profits come in, crimping returns and likely keeping a lid on Morgan Stanley’s stock price.

“I would expect us to be back doing buybacks in the first quarter,” Mr. Gorman told analysts. Morgan Stanley has about $12 billion of extra capital. “At some point we have to do something with it,” he said.

Banks’ medium-term fortunes are tied to Washington, where a new round of stimulus has been held up by partisan jockeying ahead of the presidential election next month. A new round of federal spending—particularly more unemployment insurance and checks to households—would stave off future loan defaults.

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Mr. Pruzan sounded optimistic: “It’s a matter of size and when, not if,” he said.

The firm set aside $111 million for loan losses, more than a year ago but about half of its provisions in the second quarter. Unlike peers where lending has stalled or fallen during the pandemic, Morgan Stanley’s loan book grew by 6% from a year ago, prompting one stock analyst on Thursday to ask Mr. Gorman what risk might be lurking and “how you’re getting what others are not.”

Morgan Stanley doesn’t make certain kinds of loans that are likely to go bad in a recession, like credit cards or loans to small businesses. Most of its loan growth is existing wealth-management clients borrowing against their portfolios of stocks and bonds, which the bank can seize and sell if needed, Mr. Gorman said.

Big-banks earnings season

Write to Liz Hoffman at liz.hoffman@wsj.com

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