Morgan Stanley: Profit down, shares up

Morgan Stanley shrugged off last quarter's steep losses Wednesday, helped by strong performances in its equity sales and trading and fixed income businesses.

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NEW YORK (CNNMoney.com) -- Morgan Stanley on Wednesday became the latest Wall Street firm to suffer a profit decline while beating performance forecasts, providing some comfort to jittery investors.

The No. 2 investment bank also took two writedowns - worth $1.2 billion and $1.1 billion - on its mortgage portfolio and buyout loan commitments.

Morgan Stanley (MS, Fortune 500) shares climbed by as much as 10% Wednesday on the New York Stock Exchange, and closed 1.4% higher on the day.

The company reported a 42% decline to $1.55 billion, or $1.45 a share, in the period ended Feb. 29, from $2.67 billion, or $2.17 a share a year earlier.

Revenue also fell 17% to $8.3 billion from last year's first quarter results of $9.99 billion.

'Challenging times'

But those numbers were far better than anticipated. The company was expected to report a profit of $1.03 a share on revenue of $7.19 billion, according to earnings tracker Thomson Financial.

"This feels like a more significant beat than the ones we saw yesterday," said analyst Jeff Harte, who covers Morgan Stanley and other financial services firms for Sandler O'Neill & Partners.

Just a day earlier, Goldman Sachs (GS, Fortune 500) and Lehman Brothers (LEH, Fortune 500) reported lower profits, but still managed to blow past forecasts at a time when many investors feared other broker deals could suffer the same fate as Bear Stearns (BSC, Fortune 500), which dramatically collapsed last week after suffering a liquidity crunch.

Some analysts had been expecting Morgan to fare better than some of its peers after aggressively writing down its subprime portfolio last quarter, when it suffered a humiliating loss of $3.59 billion - the first ever in the firm's 73-year history.

This time around, Morgan Stanley execs, including CEO and Chairman John Mack, who has faced growing shareholder criticism in recent weeks over his ability to lead the firm, stressed he was "satisfied" with the company's strong performance given ongoing turmoil in financial markets.

Colm Kelleher, Morgan Stanley's chief financial officer, echoed those remarks in a conference call with analysts Wednesday.

"The first quarter was one of the most challenging we've seen, but we navigated it well," said Kelleher.

Strong performances

Driving the company's results was a 51% jump in the its sales and trading of equities, as well as impressive numbers from its institutional securities and fixed-income businesses.

Revenue in the company's investment banking business improved, even as mergers and initial public offering activity has dried up on Wall Street, eliminating a key source of lucrative fees for investment banks.

Overall, Morgan Stanley delivered an impressive 20% return on equity, a key measure of the firm's profitability.

"At the end of the day it looks as though Morgan Stanley was well positioned in a very active trading market," said Harte. "The question is can it be repeated?"

Maybe the weakest component of Morgan Stanley's results was its asset management business, which posted a pre-tax loss of $161 million due to losses on securities issued by structured investment vehicles.

Like Lehman did a day earlier, Morgan Stanley took steps to stress both the strength of the firm's balance sheet and its capital position.