By Olivia Oran and Sruthi Shankar
(Reuters) - Morgan Stanley beat Wall Street's profit expectations on Wednesday, reporting gains across most of its businesses and producing more trading revenue than rival Goldman Sachs Group Inc, a rare feat.
The sixth-largest U.S. bank by assets reported an 11 percent rise in second-quarter profit, generating more revenue from giving corporations advice, underwriting securities, trading equities and managing customers' money.
The one dark spot, bond trading, fell 4 percent, much less than at Wall Street rivals that reported earnings in recent days. The $1.3 billion in revenue from that business topped Chief Executive Officer James Gorman's $1 billion quarterly target and beat Goldman's $1.2 billion.
Morgan Stanley shares jumped 3.9 percent to $46.95 in morning trading.
"We think we've made the right decisions and the results over the last five quarters in a row show we're credible and critically sized" in bond trading, Chief Financial Officer Jonathan Pruzan said in an interview.
For years, Morgan Stanley struggled to convince Wall Street that its plan to remain a major player in trading while growing wealth management was going to succeed. Its results were choppy following the 2007-2009 financial crisis, and it took time for pieces of Gorman's plan to fall into place.
But lately the bank has been hitting or exceeding targets Gorman laid out.
It was the fifth quarter in which Morgan Stanley hit Gorman's bond trading revenue goal and the second straight quarter that it surpassed Goldman's trading revenue.
Morgan Stanley's 4 percent revenue dip in that business compares with a 40 percent drop at Goldman and declines of 6 percent to 19 percent at Citigroup Inc, Bank of America Corp and JPMorgan Chase & Co.
Asked by an analyst whether he would lift his revenue target in light of recent performance, Gorman said no. Morgan Stanley needs to generate at least $1 billion in revenue, he said, simply to prove that expenses and capital related to the business are justified.
Morgan Stanley cut its bond trading staff by 25 percent last year, after having reduced risk-weighted assets by hundreds of billions of dollars. It has also been trying to get customers from other businesses to rout trading through the securities unit.
The difficult trading environment during the second quarter, with low volatility and sporadic blips of client activity, was a "robust test" of Morgan Stanley's strategy, Gorman said.
"With the firm now on solid footing, performance could still materially improve in the years ahead, assuming constructive markets," said the 59-year-old CEO, who has been in charge of the bank for more than seven years.
Morgan Stanley's overall trading revenue fell a more modest 2 percent to $3.2 billion due to a small gain in equities trading, where it is has a strong franchise. Goldman's trading revenue was $3.1 billion.
Morgan Stanley's wealth management business logged its best quarter on record. Revenue rose to $4.2 billion, up 9 percent from the year-ago quarter, and its profit margin hit 25 percent, at the high end of Gorman's targeted range.
Investment management, Morgan Stanley's smallest business, reported a 14 percent rise in revenue to $665 million.
The bank's 9.1 percent return on equity, a measure of profitability, was within the 9 percent to 11 percent target Gorman set out to hit by the end of 2017. It was higher than Goldman's 8.7 percent return during the same period.
Morgan Stanley and Goldman Sachs have long been fierce rivals in many businesses, but it has been rare for Morgan Stanley to beat Goldman in trading or be broadly more profitable.
Across Morgan Stanley, second-quarter profit rose to $1.6 billion, or 87 cents per share, from $1.4 billion, or 75 cents per share, in the same period last year.
Analysts expected earnings of 76 cents per share, on average, according to Thomson Reuters I/B/E/S.
Its revenue rose 7 percent to $9.5 billion, compared with an average estimate of $9.1 billion.
Wall Street cheered the results as Morgan Stanley's stock climbed.
"Love it when a plan comes together," Evercore ISI analyst Glenn Schorr wrote in a note to clients.
Through Tuesday's close, Morgan Stanley's shares had gained about 6.8 percent this year, outpacing a 4.2 percent rise in the KBW Bank index.
(Reporting by Olivia Oran in New York and Sruthi Shankar in Bengaluru; Writing by Lauren Tara LaCapra; Editing by Saumyadeb Chakrabarty and Meredith Mazzilli)