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Morgan Stanley Beats, but Questions Scatter Balance Sheet

Story updated with quotes from the CEO.

NEW YORK (TheStreet) --Morgan Stanley (MS) beat estimates for the third quarter, helped by higher fixed income trading revenues.

The investment bank reported a loss from continuing operations of $1 billion or 55 cents per share on revenues of $5.3 billion, compared to an income from continuing operations of $1.14 per share on revenues of $9.9 billion in the year-ago quarter.

The results included an accounting loss from the revaluation of the firm's debit valuation adjustments (DVA) due to tightening spreads of $2.3 billion. In the year-ago quarter, Morgan Stanley saw positive DVA of $3.4 billion.

Excluding DVA, the firm reported revenues of $7.6 billion compared with $6.4 billion a year ago and income from continuing operations applicable to Morgan Stanley was $561 million, or 28 cents per diluted share, compared with income of $64 million, or 2 cents per share a year ago

Analysts were expecting a third-quarter earnings per share of 24 cents on revenues of $6.362 billion. The earnings estimates, compiled by Thomson Reuters, excludes the debit valuation adjustment.

"Our third quarter results show a balanced, strategically focused franchise that has attained stronger revenues and executed on key goals," CEO James Gorman said in a release.

The firm's institutional securities segment saw revenues, excluding DVA, rise to $3.638 billion up 21% from the year ago quarter and 28% from the second quarter. Fixed income trading rose 36% to $1.5 billion from $1.1 billion a year ago on higher results in rates and gains in credit products compared to losses in the prior quarter, the firm said.

"The rebound in Fixed Income & Commodities sales and trading indicates that clients have re-engaged after the uncertainty of the rating review in the previous quarter," Gorman said.

Rival Goldman Sachs (GS) beat estimates soundly in the third quarter, reporting earlier this week an operating profit of $1.51 billion or $2.85 in earnings per share on revenue of $8.35 billion on the back of higher fixed income trading revenues and stronger performance of its investment and lending unit.

Fixed income trading has been a strong driver of revenues at other investment banks as well, including JPMorgan Chase (JPM) and Citigroup (C).

Morgan Stanley also reported stronger debt underwriting revenues, though advisory revenues and equity underwrtiting and equity trading revenues came in weak, reflecting lower market volumes.

Interestingly, Morgan Stanley said it changed its risk model to "make it more responsive to market conditions, while maintaining a long-term perspective." The move was approved by regulators.

Accordingly, the firm's average trading value at risk (VAR), a measure of the amount the firm stands to lose on any given day, fell to $63 million from $76 million in second quarter and $99 million in the third quarter.

Compensation expenses rose to $3.9 billion from $3.6 billion a year ago. CEO James Gorman has said the firm will lay off workers and cut pay to boost returns to shareholders.

Morgan Stanley is attempting to diversify its investment banking business model to become more focused on wealth management. It recently completed the purchase of an additional 14% stake in the joint venture Morgan Stankey Smith Barney from Citigroup, raising its stake to 65% and intends to purchase the remaining stake in two tranches by 2015, subject to regulator approval.

The global wealth management business saw relatively flat revenues at $3.3 billion compared to $3.2 billion a year ago, with pre-tax income from continuing operations dropping to $239 million from $356 million. The division's margin, excluding integration expenses and one-time cost associated with the additional stake purchase in MSSB, was 13%.

Morgan Stanley aims to raise the margin to the high teens to 20% range.

--Written by Shanthi Bharatwaj in New York

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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