Morgan Stanley Posts Strong Profit On Trading Growth (Update 3)

Those expectations proved to be unfounded, as Morgan Stanley's fixed income and equity trading units posted $5 billion in revenue, beating expectations of a combined $3.5 billion in revenue, according to Credit Suisse estimates. The firm's investment banking unit posted $851 million in revenue, also beating estimates of $750 million. While Morgan Stanley's equity trading operations compete with Goldman Sachs for tops in revenue, its fixed income trading division was expected to be roughly half the size of its peers, according to Credit Suisse estimates.

Morgan Stanley's fixed income and equity trading units posted year-over-year revenue gains of 34% and 6%, respectively. That contrasts to continued declines of 2% and 17% that JPMorgan and Goldman Sachs reported in the first quarter.

"Great trading results (on lower VaR), OK banking and wealth management numbers and solid expense trends all combined to produce the best quarter we've seen at MS in a long time," wrote Nomura analyst Glenn Schorr in a note to clients.

Like its investment banking peer Goldman Sachs, Morgan Stanley pulled back its risk in the quarter - signaling that risk taking tracked client trading flows. The firm's value at risk, a measure of the amount that its trading operations could lose in a single day, fell to $84 million from $123 million in the fourth quarter.

CFO Ruth Porat stressed that Morgan Stanley's risk reduction is more than a quarterly trend and extends throughout the bank. "Net debt was down $10 billion in the first quarter alone... we did this while improving revenue strength and capturing market share and maintaining high liquidity," said Porat, who cited the firms brokerage joint venture with Citigroup called Morgan Stanley Smith Barney as providing the deposit base to fund corporate and retail loans, diminishing the banks use of unsecured funding markets that it once relied heavily upon. Porat also said that as debts matured and weren't, liquidity of $179 billion was flat, improving the firm's financial flexibility.

It's both Morgan Stanley's brokerage and its liquidity that many investors and customers will be focusing this quarter and through 2012. After passing the Federal Reserve's stress tests earlier in 2012, Morgan Stanley will have the option to increase its 51% stake the brokerage joint venture by 14% in May. CEO Gorman said that he expects to gradually increase Morgan Stanley's stake in the venture according to a schedule created when it was formed in 2009 that would give the firm full control by 2014.