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Morgan Stanley posts first profit of the year

Morgan Stanley returned to profitability for the first time in a year as income from its investment banking operations offset losses in commercial real estate.
/ Source: The Associated Press

Morgan Stanley returned to profitability for the first time in a year as income from its investment banking operations offset losses in commercial real estate.

Morgan Stanley said Wednesday that stock and debt underwriting from investment banking, and rising profits from its retail brokerage business, which includes the Morgan Stanley Smith Barney joint venture with Citigroup Inc., more than balanced out $400 million in real estate losses.

The New York-based bank earned $498 million in the July-September period, after losing $13.18 billion during the last three quarters combined.

Investors reacted by sending Morgan Stanley stock up sharply in morning trading. It jumped $2.04, or 6.3 percent, to $34.56.

The commercial real estate losses are a reminder that the broader economy continues to struggle even as financial companies profit from their investment banking and trading operations. Morgan Stanley has invested more heavily in commercial real estate than some competitors like Goldman Sachs Group Inc.

The value of commercial real estate has tumbled in many parts of the country as many small companies shut down due to the recession, leaving a growing amount of office building and shopping center space empty. Moreover, commercial real estate rents are falling, cutting into the income landlords get from their properties.

Like Goldman and JPMorgan Chase & Co., Morgan Stanley used a rebound on Wall Street to bolster its bottom line during the third quarter. Revenue from managing other companies' stock offerings more than doubled in the quarter to $457 million, while revenue from underwriting debt offers jumped 25 percent to $303 million.

Morgan Stanley is also reaping benefits from the expansion of its retail brokerage business. The bank acquired a majority stake in Smith Barney from Citigroup in May, and merged the operations with its own wealth management division. The combined operations helped Morgan nearly double its revenue to $3.03 billion in that division.

It is widely expected Morgan Stanley will exercise its eventual option to purchase Citigroup's 49 percent stake in the venture.

Morgan Stanley had gains in both trading and investing in the third quarter. The bank was criticized for remaining too conservative during the second quarter as a market rebound started in March and helped competitor Goldman post a staggering profit. Morgan Stanley's cautiousness hindered its ability to offset real estate and other losses in the second quarter.

Revenue from third-quarter principal trading and investments accounted for 39 percent of Morgan Stanley's total revenue, up from 34 percent in the second quarter, as it began ramping up its trading business again. However, that was far behind Goldman, which generated more than 80 percent of its third-quarter revenue from principal trading and investments.

CEO John Mack, who will retire in January, said trading provides Morgan Stanley one of its biggest avenues for growth, but he also signaled that the bank would balance its appetite for growth with careful risk management.

"Although we still have work to do in sales and trading, it offers our single biggest opportunity for growth as we build out our client flow business and pursue disciplined risk-taking," Mack said in a statement.

James Gorman, currently a co-president of the bank, will take over as CEO. Mack will remain as chairman.

Morgan Stanley's third-quarter profit applicable to common shareholders totaled $498 million, or 38 cents per share. Analysts polled by Thomson Reuters, on average, were expecting earnings of 27 cents per share.

Morgan Stanley's quarterly results were hurt for a third straight quarter by an accounting charge related to the rising value of its own debt. The bank took a $900 million charge to reflect the greater cost it would incur to repurchase its outstanding debt, which is worth more now because of the bank's improving financial condition.

That same accounting rule allowed Morgan Stanley to book a $9.7 billion gain during the third quarter last year as its debt plummeted in value amid fears it might collapse, as its competitor Lehman Brothers did.

Revenue totaled $8.68 billion in the third quarter, easily topping analysts' forecast for $7 billion. Morgan Stanley generated $18.01 billion in revenue during the same period last year, which was skewed by the $9.7 billion accounting adjustment.