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Morgan Stanley Trading Unit Disappoints (Update 1)

Updated from 7:45 a.m. ET with additional information throughout.

  • Morgan Stanley reports first-quarter profit of $1 billion, or 61 cents per share
  • Analysts expected 57 cents a share, according to consensus estimates available at Thomson Reuters. Last year, Morgan Stanley lost 5 cents a share.
  • Net revenue came in at $8.475 billion, against estimates of $8.35 billion.

NEW YORK ( TheStreet) -- Morgan Stanley (MS - Get Report) swung to a profit in the first quarter, though erratic performance in its trading businesses continued to plague the U.S. securities giant.

Morgan Stanley shares were down 3.19% to $20.79 in mid-morning trading.

Morgan Stanley earned $1 billion, or 61 cents a share, compared to a loss of $79 million, or 5 cents per share, for the same period a year ago.

The result beat analysts' expectations for earnings of 57 cents per share.

Revenue of $8.475 billion was also ahead of analysts expectations of $8.35 billion. Both the revenue and earnings figures were adjusted to leave out an accounting oddity known as a debt valuation adjustment (DVA), which causes revenue to fall when a company's credit quality improves. Including the DVA, Morgan Stanley revenue was $8.2 billion and earnings were 50 cents per share.

Results also got a boost of 7 cents per share from a tax benefit, according to Atlantic Securities analyst Richard Staite, who has an "underweight" rating on the stock.

In an interview, Staite said "the underlying revenue was somewhat disappointing." Particularly weak, he said, were Morgan Stanley's fixed income currency and commodities (FICC) trading and investment banking businesses.

Revenue in FICC fell to $1.5 billion compared with $2.6 billion a year ago. That 42% decline compares to a 9% decline for Morgan Stanley peers, according to a report from Nomura analyst Glenn Schorr. Investment banking revenue from advising on deals fell to $251 million from $313 million a year ago.

According to Staite's calculations, return on tangible common equity for the quarter, which is traditionally the strongest of the year, was just 7.8%. That compares to 16.9% for Wells Fargo (WFC - Get Report), 14.4% for JPMorgan Chase (JPM - Get Report) and 10.5% for Citigroup (C - Get Report).

One major reason for the positive earnings comparison to a year ago is that last year's results were dragged down by what the bank attributed to losses resulting from hedges on its long-term debt.

On the positive side, Morgan Stanley showed improvement in its Global Wealth Management and Asset Management units -- areas it has been emphasizing increasingly under CEO James Gorman. Global Wealth Management, which includes retail brokerage and Morgan Stanley Smith Barney, saw revenue rise to $3.5 billion compared with $3.3 billion a year ago. Asset management revenue of $645 million were up 21% from a year ago. Morgan Stanley attributed those gains both to fees from managing client assets as well as gains from proprietary investments. The asset management business got 70% of its $645 million in revenue from fees during the quarter.

Nomura's Schorr, who has a "neutral" rating on Morgan Stanley, chose to put a positive spin on the results in a report Thursday.

"A mixed bag at the [investment bank] isn't so bad when wealth management is so much better (and about to be bigger)," he wrote.

-- Written by Dan Freed in New York.

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

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