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Morgan Stanley eked out a surprise increase in equities trading revenue in the fourth quarter, relying on a one-time gain, as its fixed income business slumped. The company raised its long-term profitability target.

Equities trading revenue advanced 13% in the fourth quarter, driven by a one-time $225m gain on an investment, New York-based Morgan Stanley said on Wednesday in a statement. That compared with analysts’ estimates for little change vs a year earlier. Fixed income revenue declined 31%.

The results matched Morgan Stanley’s biggest competitors, which reported slowdowns in their trading businesses, just as bonus payouts for star traders and bankers weighed on expenses. At Morgan Stanley, non-interest expenses for the year rose 19%, including costs related to integrating recent acquisitions.

“We had revenue growth and strong expense discipline,” CFO Sharon Yeshaya said in an interview. On the trading and dealmaking outlook, Yeshaya said it’s a more difficult business to forecast, noting volatility from central bank rate moves is “the unknown we grapple with”.

In its investment bank, non-interest expenses only rose 9%, indicating compensation increases for its bankers might be less generous than at rival Goldman Sachs. 

Morgan Stanley raised its target for return on tangible common equity, saying it now expects the metric to reach more than 20% over the long term, lifting it from a previous target of 17%. It expects an additional $500m in net interest income from its wealth-management business in 2022, based on market expectations for Federal Reserve interest rate hikes.

Investors have been punishing bank stocks this earnings season, pouncing on signs that the Wall Street engines that have driven revenue to record highs have started to cool off. Shares of Morgan Stanley, which lost 8.3% in the past two trading sessions, were up 2.2% to $96.20 in early New York trading.

Investment banking revenue of $2.43bn fell short of the average estimate of $2.48bn. Advisory fee revenue jumped 30% to $1.07bn.

Wealth management revenue was nearly in line with estimates at $6.25bn, a 10% gain for a business that the bank is betting can deliver higher net-interest income this year amid rising rates. The business, along with investment management, contributes more than half of Morgan Stanley’s revenue, and is less volatile than the institutional securities business that houses traders and dealmakers. Inflows totalled $438bn for the year for its wealth unit.

Equity underwriting revenue dropped 15% to $853m. The bank took the surprise action of putting its senior equities banker, Pawan Passi, on leave in November without disclosing a reason. 

Other results include net income rose 9% to $3.7bn and companywide revenue increased 7% to $14.5bn.

Bloomberg News. More stories like this are available on bloomberg.com


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