Net income from continuing operations was $1.8 billion on net revenues of $8 billion, advancing 59% and 15% respectively. Earnings from continuing operations were $1.75 per diluted share, a 61% increase and well ahead of the consensus estimate of $1.37 per share.
Morgan Stanley's stalwart Institutional Securities segment (63% of net revenues for the nine months to Aug. 31) put in a terrific performance, with a 55% increase in net revenues to $5 billion, driven by growth across all activities (including equity and fixed income trading, underwriting, and M&A). Call it nitpicking, but I was surprised to hear CFO David Sidwell say that the equity underwriting pipeline is "down significantly." His assurances that this isn't tied to any loss in market share appear inconsistent with his competitors' reports that their pipelines remain very healthy.
Along with Merrill Lynch and longtime rival Goldman Sachs, Morgan Stanley is one of the "best in class" global investment banks, so it comes as no surprise that its core Institutional Securities segment performed well. Current (or potential) Morgan Stanley shareholders should be more concerned with the state of the laggard Wealth Management and Discover units. On both fronts, the quarter's results appear to confirm that management's turnaround plans are paying off. Net revenues for Wealth Management and Discover increased 9% and 15% respectively, and gains in pre-tax income were even more significant. Furthermore, the progress for the quarter is in line with trends for the first nine months of this fiscal year.
These improvements won't help to revive discussions regarding a possible spin-off of the Discover credit card unit. That's a shame, because I'm not convinced this is a business the firm should be involved in. While supporters of the 1997 merger between Morgan Stanley and Dean Witter might argue that the activity adds stability to earnings, I don't see much merit to that. Some earnings volatility is a natural consequence of an investment bank's operating model, which turns on the ability to bear and manage a wide variety of market-related risks. For investors who aren't comfortable with this model, "universal banks" such as Citigroup
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