Morgan Stanley profit drops 14% as deal drought persists

By Tatiana Bautzer and Mehnaz Yasmin

(Reuters) -Morgan Stanley’s profit slipped 14% in the second quarter from a year earlier as a deal-making slump persisted, while trading in stocks and bonds weakened.

Revenue from investment banking was flat at $1.16 billion. Trading revenues slid as volatility declined, with fixed income sinking 31% while equities fell 14%.

CEO James Gorman cited a “challenging market environment,” in the quarter, which “started with macroeconomic uncertainties and subdued client activity, but ended with a more constructive tone”.

While more subdued markets weighed on trading, stabilizing market conditions had not yet spurred activity in capital markets, Chief Financial Officer Sharon Yeshaya said in a phone interview.

Still, “we expect investment banking to lead the recovery in the next quarter,” she said.

The Wall Street giant followed rivals including JPMorgan Chase (NYSE:) and Citigroup (NYSE:) in reporting tepid trading results. By contrast, Bank of America (NYSE:) reported a surprise gain in markets revenue on Tuesday.

Excluding one-off items, Morgan Stanley (NYSE:) earned $1.24 a share on a revenue of $13.46 billion, comfortably beating estimates of $1.15 a share on $13.08 billion revenue, according to data from Refinitiv IBES.

The “results appear much better than feared in a challenging environment,” UBS analyst Brennan Hawken‎ wrote in a note.

Morgan Stanley’s earnings were also eroded by $300 million in severance costs after the bank laid off thousands of employees this year.

Gorman announced in May that he would step down within a year. Morgan Stanley’s board will focus on the selection Gorman’s successor at its summer and fall meetings, a person familiar with the situation told Reuters last month.

Among the three top candidates are Ted Pick, the company’s co-president who leads its investment banking and trading arm, and co-president Andy Saperstein, who runs wealth management.

Although the results of the business units have diverged, Gorman has stressed their performance is not the only consideration for CEO selection.

The bank’s wealth management unit reported record net revenue of $6.7 billion, 16% higher than a year earlier. It gained $90 billion in new assets in the second quarter.

Revenue from investment management, run by the third CEO candidate, Dan Simkowitz, slipped 2%.

Morgan Stanley’s shares rose almost 1% in early trading.