Morgan Stanley (MS), owner of the world’s largest brokerage, reported a 66 percent earnings increase that beat analysts’ estimates as stock-trading revenue jumped and wealth-management profit margins climbed to a record.

Second-quarter net income rose to $980 million, or 41 cents a share, from $591 million, or 29 cents, a year earlier, the New York-based company said today in a statement. Excluding accounting gains tied to the firm’s own debt and a charge related to the purchase of the remaining stake in its brokerage joint venture, profit was 45 cents a share, topping the 43-cent average estimate of 26 analysts surveyed by Bloomberg.

Chief Executive Officer James Gorman, 55, last month completed the purchase of a brokerage that had been a joint venture with Citigroup Inc., capping a four-year effort to more than double the size of his bank’s wealth-management division. Gorman also boosted targets for that unit’s margins and set a goal for next year’s profitability as he seeks to show progress in improving returns to fuel the stock’s 39 percent jump this year to 97 percent of tangible book value.

“Investors are interested in how they can build out the wealth-management unit now that the integration is over, and they’re hitting higher profitability targets,” said Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis. “Investors are willing to pay tangible book, but to pay more than that, I think we need to see more fundamental improvement.”

Share Performance

The firm said it would begin a $500 million stock repurchase program after receiving no objections from the Federal Reserve. The shares rose to $28.10 at 7:46 a.m. in New York from $26.54 yesterday. They climbed 26 percent in 2012, and as of yesterday were still 10 percent below their price at the end of 2009, when Gorman took over.

Revenue excluding accounting adjustments rose to $8.33 billion from $6.6 billion a year earlier. Book value per share increased to $31.48 from $31.21 at the end of March. The firm’s return on equity, a measure of how well it reinvests earnings, was 4.4 percent.

Gorman said in May that his firm can post a 10 percent return on equity, double that of 2012, by next year if regulators allow it to return a “reasonable” amount of capital to shareholders. ROE was 8 percent in the first quarter.

The accounting gain is known as a debt valuation adjustment, or DVA. It stems from decreases in the value of the company’s debt, under the theory it would be less expensive to buy it back. The firm had a $175 million gain from DVA, versus a $350 million benefit in the second quarter of 2012.

Wealth Management

Pretax profit from global wealth management, overseen by Greg Fleming, 50, jumped 60 percent to $655 million as revenue climbed to $3.53 billion. The division’s pretax profit margin rose to 19 percent, a record since the joint venture was established in 2009, from 13 percent in the second quarter of 2012.

The wealth-management unit can earn a pretax margin of more than 23 percent by 2015 as interest rates and stock markets climb, Gorman said last month. The unit can achieve a 20 percent to 22 percent margin absent any changes in the broader markets, he said.

In equities trading, headed by Ted Pick, Morgan Stanley’s revenue increased 58 percent from a year earlier to $1.81 billion, excluding DVA. That compared with $1.19 billion at Bank of America Corp. (BAC) and $1.77 billion at Goldman Sachs Group Inc., excluding revenue from Goldman Sachs’s reinsurance business.

Analysts’ Estimates

Keith Horowitz, an analyst at Citigroup, had estimated equities revenue of about $1.4 billion, while Barclays Plc’s Roger Freeman estimated $1.5 billion.

Second-quarter revenue from fixed-income sales and trading, run by Michael Heaney and Rob Rooney with commodity trading co-heads Colin Bryce and Simon Greenshields, was $1.15 billion, excluding DVA. That compared with estimates of $1.2 billion from JPMorgan Chase & Co.’s Kian Abouhossein and $1.3 billion from Freeman at Barclays.

Fixed-income revenue rose 50 percent from $770 million in the year-earlier quarter. This year’s figure compared with $2.46 billion at Goldman Sachs and $3.37 billion at Citigroup.

Morgan Stanley’s jump in fixed-income revenue came as it navigated markets that rival banks described as challenging. Long-term interest rates rose and risk premiums on debt widened in June after Fed Chairman Ben S. Bernanke indicated the central bank might taper its $85 billion in monthly bond purchases, which have boosted demand for higher yielding assets.

Moody’s Review

The increase marks a rebound from last year’s second quarter, when the firm posted its lowest fixed-income revenue in more than two years. The company has said the underperformance was caused in part by clients halting some trading amid a Moody’s Investors Service review of its credit rating that quarter, which resulted in a downgrade.

Heaney and Rooney were named to oversee the fixed-income business in May after Ken deRegt left to join investment firm Canarsie Capital Group. Gorman laid out a plan in June to boost returns in fixed-income trading above the company’s cost of equity after four of the five units failed to meet that metric last year.

Part of that plan may be a change to the firm’s commodities business. The firm is cutting 10 percent of its workforce in commodities, a person briefed on the matter said last month. Gorman said in June that he’s “carefully re-evaluating” the proper structure for the commodities unit after holding talks with Qatar’s sovereign-wealth fund last year about selling a stake in the business.

Investment Banking

Investment banking, led by Mark Eichorn and Franck Petitgas, generated $1.08 billion in second-quarter revenue. That figure, up 22 percent from a year earlier, included $333 million from financial advisory, $327 million from equity underwriting and $418 million from debt underwriting.

Morgan Stanley (MS) was the second-ranked underwriter of global equity, equity-linked and rights offerings in the first half, behind Goldman Sachs, according to data compiled by Bloomberg. It was the No. 3 adviser on global announced mergers and acquisitions and the seventh-ranked underwriter of U.S. bonds, the data show.

Asset management reported a pretax profit of $160 million, compared with $43 million in the previous year’s period.

Morgan Stanley didn’t disclose its so-called leverage ratio. U.S. regulators last week proposed minimum levels of 5 percent for holding companies and 6 percent for banking subsidiaries. The U.S. plan goes beyond the 3 percent global minimum requirement that the Basel Committee on Banking Supervision approved to help prevent a repeat of the 2008 financial crisis.

Source: Bloomberg