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Steve Walker
Business Analyst / PM - Associate, Goldman Sachs,
New York, NY

Premium Contributor
STREET Cred - 2,114

By MICHAEL J. DE LA MERCED

Morgan Stanley said on Thursday that it swung to a profit in the second quarter, but its revenue fell as the firm contended with the doldrums that have descended on the banking industry.

The firm said it earned $563 million from continuing operations in the second quarter. That amounted to about 28 cents a share, missing analysts’ estimates. On average, analysts expected the company to earn 43 cents a share, according to Thomson Reuters.

Excluding certain one-time gains, the company reported that revenue fell to $6.6 billion from $9 billion in the period a year earlier. Including adjustments, revenue fell to $6.95 billion from $9.2 billion in the year-ago quarter.

Morgan Stanley’s profit was 16 cents a share, excluding accounting gains related to the value of its debt. Its return on equity from continuing operations, a prominent measure of profitability, was only 3.5 percent.

Shares in the firm fell 2.8 percent, to $13.60, in premarket trading.

The results are the latest in a series of tepid earnings reports by Wall Street firms. Goldman Sachs this week reported a 12 percent decline in second-quarter earnings, and a mediocre 5.4 percent return on equity. Bigger rivals like JPMorgan Chase, Citigroup and Bank of America have also struggled.

Unpredictable market swings and global turmoil like the European sovereign debt crisis have upended traders’ ability to turn a profit and frightened corporate clients from pursuing takeovers and sales of stock or debt.

And tougher financial regulations have required banks to hold onto more capital and reduce risk-taking, clamping down on opportunities to make a profit.

That has led institutions like Morgan Stanley to retrench, making steep cuts in their employee rolls and other operating expenses in the hope of bolstering profitability.

The response by James P. Gorman, Morgan Stanley’s chairman and chief executive, has been to work to transform his firm into a smaller, safer company that takes fewer risks. That has involved expanding its wealth management operations by buying out Citigroup’s share of the Smith Barney brokerage.

“Although global economic uncertainty remains a headwind, we are proactively positioning the firm for success,” Mr. Gorman said in a statement. “We continue to be focused on taking the necessary steps to deliver strong returns for our shareholders.”

But the recasting of Morgan Stanley has hit a few snags. Last month, Moody’s Investors Service cut the firm’s credit rating by two notches — though in a small victory for Morgan Stanley, it spared the bank from what could have been a three-level downgrade.

Still, Morgan Stanley now bears a credit rating that is only three notches above junk status.