Morgan Stanley Chief Executive James Gorman said the bank has turned itself around and can meet its goals for profitability, his boldest pronouncements yet about the near-term potential for a company that has long lagged its peers.
The investment bank and wealth manager on Friday posted fourth-quarter earnings that beat analysts' average estimate by a wide margin, helped by a big jump in trading revenue and stronger performance in its wealth management group.
Morgan Stanley's fixed-income trading business performed worse than its rivals, and its overall return on equity, a measure of how efficiently the bank wrings profit from shareholder money, was less than half that of Goldman Sachs Group Inc. But Gorman told investors the bank was "working aggressively" to improve return on equity.
In current market conditions, the bank's return on equity can reach 10 percent, the CEO said on a conference call. That figure is the bare minimum that many investors demand, analysts said.
"After a year of significant challenges, Morgan Stanley has reached a pivot point," Gorman said in a statement. "Our firm is now poised to reach the returns of which it is capable on behalf of our shareholders."
The Wall Street bank said its wealth management division delivered a 17 percent pretax profit margin in the quarter, exceeding an internal target.
That business's performance is closely watched by investors because Gorman is staking the future of the bank on wealth management, arguing that more stable returns in the business will help offset volatility from trading and investment banking.
The bank's stock climbed 7.5 percent to $22.31 (14.05 pounds) in midday trading Friday.
Morgan Stanley is one of several Wall Street banks using layoffs and compensation cuts to help boost its bottom line. The firm paid out 44 percent of adjusted revenue to employees in its securities and investment banking business last year, down from 53 percent in 2011, Chief Financial Officer Ruth Porat said in an interview.
Across the entire company, compensation costs fell by $711 million, or 4 percent, in 2012 as Morgan Stanley cut nearly 5,000 employees from its payroll.
Overall, the bank reported fourth-quarter income from continuing operations of $573 million, or 28 cents per share, compared with a loss of $222 million, or 13 cents per share, in the year-ago period, when it took a big one-time charge.
Excluding an accounting charge related to changes in the value of Morgan Stanley's debt, the bank earned $894 million, or 45 cents per share. On that basis, analysts' average forecast was 27 cents per share, according to Thomson Reuters I/B/E/S.
In sales and trading, adjusted revenue more than doubled from a year earlier, to $2 billion from $867 million. Fixed-income, currency and commodities trading revenue was $811 million, adjusted for accounting charges, compared with a loss of $493 million a year earlier.
Glenn Schorr, an analyst at Nomura, said Morgan Stanley's fixed-income currency and commodities trading business posted an increase of 26 percent in adjusted revenue, while peers reported an average gain of 43 percent.
Morgan Stanley is the last big U.S. bank to report earnings this week. Rival Goldman Sachs on Wednesday said it cut compensation costs 11 percent in the fourth quarter, helping boost returns to shareholders.
(Additional reporting by Anil D'Silva; Editing by Supriya Kurane and John Wallace)