By Richa Naidu and Sudarshan Varadhan
(Reuters) - Morgan Stanley's (N:MS) quarterly profit fell by more than half as the Wall Street bank's fixed-income trading and investment banking businesses took a hit from market volatility early in the year.
But the earnings still handily beat expectations as the bank slashed employee compensation, helping to push up its shares 2.5 percent in premarket trading on Monday.
Sliding commodity and oil prices, worries about the Chinese economy and uncertainty about U.S. interest rates made for wobbly markets in January and February, scaring off traders, investors and companies hoping to list on stock exchanges.
All of the big U.S. banks that have released first-quarter results have reported lower revenue from investment banking and trading, but earnings have generally topped low expectations.
"The first quarter was characterized by challenging market conditions and muted client activity," Chief Executive James Gorman said in a statement.
"While we see some signs of market recovery, global uncertainties continue to weigh on investor activity."
Morgan Stanley's stock fell about 21 percent in the quarter - the sharpest decline of any big U.S. bank.
The bank's return on average common equity was 6.2 percent in the quarter ended March 31, well short of Gorman's target of 10 percent.
"It is going to be very difficult to achieve the 10 percent return on equity when you have revenues as muted as they were in the first quarter," Stephen Biggar, an analyst at Argus Research, told Reuters.
Earnings applicable to common shareholders fell 54.4 percent to $1.06 billion, or 55 cents per share, in the period, from $2.31 billion, or $1.18 per share, a year earlier, when the bank reported its most profitable quarter since the financial crisis.
Excluding an accounting adjustment, the bank also earned 55 cents per share.
Analysts on average had expected earnings of 46 cents per share, according to Thomson Reuters I/B/E/S.
Net revenue fell 21.3 percent to $7.79 billion, missing the average estimate of $7.87 billion.
CHANGING FOCUS
Morgan Stanley has been shifting its focus away from more volatile areas such as bond trading and towards more stable businesses such as wealth management.
Revenue from wealth management fell 4.3 percent to $3.67 billion during the quarter, but this accounted for 47 percent of net revenue compared with 39 percent in the same period of 2015.
The bank said it cut the cost of compensation and benefits by 18.6 percent to help offset declining revenue.
Adjusted revenue from fixed income and commodities trading slid 54.1 percent to $873 million.
Equities trading revenue fell 9.3 percent to $2.06 billion, reflecting volatile global equity markets.
Investment banking revenue, which includes fees from mergers and income from equity and debt underwriting, fell 18.4 percent to $1.11 billion. The business was a strength in the prior quarter.
Industrywide investment banking fees fell 29 percent in the period, the worst first-quarter since 2009, according to Thomson Reuters data. (http://tmsnrt.rs/1TWaz4p)
Morgan Stanley ranked second globally in mergers advisory for the quarter, behind Goldman Sachs Group Inc (N:GS), Morgan Stanley's traditional rival, which will wrap up the earnings season for big U.S. banks on Tuesday.
Up to Friday's close of $25.76, Morgan Stanley's stock had fallen about 19 percent this year.
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Loan performance of U.S. large-cap banks
U.S. large-cap banks : Q1 stock performance
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