After a period of underperformance, financial services giant Morgan Stanley (NYSE:MS) has quickly turned itself around. It's now growing faster than archrivals Goldman Sachs (NYSE:GS) and Merrill Lynch (NYSE:MER), and a couple of timely moves may help keep it chugging along.
Morgan reported first-quarter results yesterday that saw net revenue jump 29%. Reported diluted earnings improved an impressive 71%, after a small gain from the sale of a business to Citigroup (NYSE:C). Return on average common equity nearly reached 30%, up significantly from last year's 21.3%, marking the sixth straight quarter it has exceeded 20%.
As has been the case, nearly every division reported solid results for the quarter. Morgan Stanley operates in the three key areas of the securities business:
- Its Institutional Securities segment deals with asset creation, or the underwriting of securities.
- Global Wealth Management is involved in the distribution, or broking and dealing of asset.
- Asset Management deals with the holding and management of securities.
There's also the Discover credit card business, which will soon be sent packing. Here is a run down of each key area for the year:
Institutional Securities (IS)
IS consists of the flagship investment-banking, trading, and sales businesses, accounting for the bulk of total company revenue. Major competitors include Goldman, Lehman Brothers (NYSE:LEH), and Merrill. Net revenue for the quarter grew 37% and pre-tax income advanced 71%. Every underlying business saw sales growth in the double digits, with notable strength in fixed income and equity sales and trading.
Global Wealth Management (GWM)
GWM includes the management of brokerage assets and related investment advisory services. The above peers, barring Goldman, also have brokerage divisions. Quarterly net revenue grew 18% but pre-tax income grew significantly from a small base in last year's first quarter. The group managed total assets of $690 billion, an 11% increase from last year, making Morgan one of the largest brokers in the country.
Asset Management (AM)
AM made up about 8% of total quarterly revenue. It includes portfolio management functions for high-net-worth individuals and fund assets. Quarterly net revenue grew 28%, while pre-tax income advanced 37%. Total assets under management (AUM) continued to grow, rising 10% from last year's quarter to $500 billion.
Discover
Discover was the only segment to report a net revenue and pre-tax income drop. Last year, Morgan announced it would spin off Discover to shareholders to focus on its core investment-banking and asset-management businesses. The transaction is scheduled to be completed in the third quarter, freeing Discover to compete on its own as one of the four primary credit card companies, against Mastercard (NYSE:MA), Visa, and American Express (NYSE:AXP).
I wouldn't expect Morgan Stanley to keep posting such stellar results going forward, but so far, it seems to have avoided the pitfalls plaguing other financial firms: international volatility and domestic housing exposure. In fact, Morgan is using its strong financial position to move into the residential mortgage market, picking up assets near what it hopes will be the bottom of the cycle. Last year, it picked up subprime lender Saxon Capital, and it's now on the prowl for further acquisitions in the space.
It's hard to see the Discover spinoff helping to focus Morgan Stanley even further, since the company already appears to be firing on all cylinders. Still, shareholders may want to consider hanging onto the credit card stock once it's freed from the parent. Discover could become a more nimble operator on its own, or be snapped up by a larger competitor.
In any case, CEO John Mack has quickly put Morgan Stanley back on the pedestal of highly respected Wall Street firms. How long it stays there is anyone's guess, but now may not be the time to bet against it.
For related Foolishness:
- Foolish Forecast: Morgan Stanley Gets Ready to Deliver
- Morgan Stanley Re-Discovers Itself
- Investment Banks Under the Microscope
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. Mastercard is an Inside Value recommendation. The Fool has an ironclad disclosure policy.
