Morgan Stanley Finally Profits

Morgan Stanley (MS - Analyst Report) reported third-quarter 2009 income of $498 million this morning or 38 cents per share, compared with a loss of $159 million or $1.37 per share in the prior quarter and an income of $7.7 billion, or $7.38 per share a year ago. The results were much ahead of the Zacks Consensus Estimate of 30 cents per share.

The results marked the first quarter of income in a year’s time. Results were aided by robust underwriting revenues in the investment banking operation resulting from higher levels of market activity, strong growth in fixed income sales and trading, commodities, prime brokerage and wealth management business, which offset losses in commercial real estate.

Unlike the preceding qaurters, the results were in line with strong results from competitors like Goldman Sachs (GS - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report), which has been grabbing market share after the financial crisis.

Net revenues for the quarter were $ 8.7 billion, up 60% sequentially but down 52% year-over-year compared with $18.0 billion in the third-quarter 2008. Global wealth management delivered strong results with underwriting revenues up 91% year-over-year to $3.0 billion. There were strong gains in both equity and debt underwriting, which more than balanced out $400 million in real estate losses.

However, the company’s exposure to the Commercial Real Sector, which is deteriorating continuously, will remain a cause for concern in the coming quarters.

The results were positively affected by the expansion of its retail brokerage business. The bank acquired a majority stake in Smith Barney from Citigroup Inc. (C - Analyst Report) in May, and merged the operations with its own wealth management division. We believe Morgan Stanley will eventually buy out the remaining 49% stake from Citigroup soon enough.

The company recorded $900 million in charges related to the repurchase of its outstanding debt, which is worth more now because of the bank's improving financial condition.

In connection to the restructuring of its investment management division, Morgan Stanley announced the sale of its retail asset management business, including Van Kampen Investments. The divestment will allow Morgan Stanley to sharpen its focus on its institutional client base in asset management.

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