Morgan Stanley posts record profit on trading boom

By Elizabeth Dilts Marshall and C Nivedita

(Reuters) - Morgan Stanley posted a record quarterly profit on Thursday that blew past analysts' expectations as another of Wall Street's big investment banks gained from huge swings in financial markets due to the coronavirus crisis.

The bank wrapped up second-quarter results for the big U.S. lenders that shook out along expected lines. Trading powerhouses Morgan Stanley and Goldman Sachs performed better than Main Street rivals JPMorgan Chase, Bank of America and Citigroup, which had to build massive reserves for loans that may go bust.

Morgan Stanley Chief Executive Officer James Gorman, like other Wall Street executives this week, cautioned that the bank's record-setting trading numbers would be hard to repeat in the coming quarters.

"Clearly, it will be challenging for the back half of 2020 to meet the record first half results .... That said, many parts of our business should continue to perform well," said Gorman.

A hallmark of Gorman's tenure as CEO has been the bank's decade-long expansion into wealth and asset management, businesses that diversified the bank's revenue streams and provide balance against the unpredictability of its trading business.

Gorman said the decision to keep the bank's consumer loan business small also helped this quarter. Credit cards and small business loans are expected to be badly hit by the COVID-19 pandemic, and rival bank Goldman Sachs had to set aside $1.6 billion for loans that could go bad.

In contrast, Morgan Stanley set aside just $239 million.

The bank's stock was up over 3% at $52.98 by mid-morning.

"Morgan Stanley's impressive second-quarter results strongly reflected its favorable business mix," said Donald Robertson, a senior vice president at Moody's Financial Institutions Group. "Its lack of traditional retail and commercial banking activities left it ... unscathed from the large loan-loss provisions."

For a graphic of banks' trading revenue, see https://fingfx.thomsonreuters.com/gfx/mkt/oakveabykvr/MicrosoftTeams-image%20(6).png

TRADING, INVESTMENT BANKING SURGE

The bank's trading unit recorded a 68% jump in revenue, led by a nearly 168% surge in bond trading. Equities trading revenue rose 23%.

Investment banking was another bright spot, with revenue jumping 39% as companies looked to shore up their financial position to ride out the effects of COVID-19 pandemic.

Overall revenue jumped 31% to a record $13.41 billion in the quarter, clocking a rise in all its segments.

In the wealth management unit, where revenue rose 6% since last year, clients took advantage of both the markets and lower interest rates to borrow more. The unit generated about a third of the bank's revenue for the quarter.

Securities-based loans, or loans on the value of one's brokerage account, rose 17% year over year, while mortgages rose 12%.

The bank's earnings attributable to common shareholders rose 45% to $3.2 billion, or $1.96 per share. Analysts on average had expected a profit of $1.12 per share, according to IBES data from Refinitiv.

(Reporting by C Nivedita and Elizabeth Dilts Marshall in New York, with additional reporting by Matt Scuffham in London; Writing by Anirban Sen; Editing by Saumyadeb Chakrabarty and Nick Zieminski)