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Story updated with additional information.



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Morgan Stanley

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shares were trading higher on Thursday after the firm reported earnings and revenue growth above Wall Street's expectations.

Morgan earned $600 million, or 41 cents per share, up 60% from a year ago when the bank earned $376 million, or 29 cents per share. Net revenues were 14% higher at $7.8 billion, reflecting improvements on an annual basis in all business segments -- from asset management to institutional securities.

Analysts had been expecting a profit of 35 cents per share on revenue of $7.35 billion, on average, according to



In recent trading, Morgan Stanley shares were up 1.2% at $28.07. Wall Street's positivity after the firm's earnings was a sharp reversal from recent days, when slowdown in fourth-quarter trading at


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Goldman Sachs

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sent financial stocks lower.

Morgan Stanley's fixed-income trading division faced the same headwinds last quarter as other firms, partly due to a sharp, unexpected reversal in 10-year Treasury yields and changing credit conditions. The division lost $29 million last quarter, vs. net revenues of $663 million a year earlier.

Part of the loss came from what CFO Ruth Porat called a "whipsaw" in the bond market which affected trading. Improvements in investors' view of Morgan's own creditworthiness also forced the firm to take an $842 million valuation adjustment charge. The accounting oddity, known as a DVA, reflects the declining value of credit default swaps that protect against its inability to repay debt.

Yet, overall, Morgan Stanley's institutional securities division -- its largest business line, which houses the trading group -- saw revenue climb 12% to $3.6 billion, from $3.2 billion a year earlier, with profit up 28% to $533 million.

During a conference call with analysts, Porat said market volatility, combined with reduced client activity, presented challenges as the firm tries to build out its trading franchise. In fixed income, she said, Morgan Stanley is "looking for a more predictable environment," with an "absence of risk-on, risk-off, which, at its core, had a lot of policy-driven events" driving bond yields.

"A more benign environment allows us to close the gap in our fixed income business," she said, after receiving questions from several analysts about the trading decline.

CEO James Gorman said that the bank delivered "strong results" despite "challenging markets." But he acknowledged that in fixed income, "there is more to be done to drive revenue and market share growth."

On the bright side, Morgan Stanley's planned purchase of the Smith Barney franchise -- which is now a joint venture with Citi -- has started to pay off.

Its wealth management division saw $14.1 billion in new asset inflows. Revenue in the division, which houses Smith Barney, increased 7% to $3.4 billion while profit climbed exponentially to $166 million from $29 million a year ago.

Gorman said that new asset growth provided "the clearest signs yet of the important progress we have made in integrating Morgan Stanley Smith Barney."

Asset management, the smallest of its three business lines, also saw a sharp increase in both profit and revenue.

For all of 2010, the bank swung to a profit of $3.6 billion, or $2.63 per share, from a loss of $907 million, or 77 cents per share, in the prior year. Net revenue climbed 35% to $31.6 billion from $23.4 billion, with gains in all of its business lines.

-- Written by Lauren Tara LaCapra in New York


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