Morgan Stanley Quarterly Profit Rises 60%, to $600 Million

Morgan Stanley swung into a profit in the fourth quarter, as earnings rose almost 60 percent, to $600 million, or — good news for a Wall Street bank that has been struggling to turn around its operations.

The bank had a rough third quarter, when it posted a $91 million loss, as low client activity and ho-hum markets took a bite out of profit.

Morgan Stanley posted a yearly profit of $3.6 billion on revenue of $31.6 billion. That is a big improvement from 2009, when it reported a loss of $907 million on revenue of $23 billion. On the quarter, the firm notched earnings per diluted share of 41 cents, up from 29 cents in the same period of 2009.

The fourth-quarter results were a surprise, with earnings per basic share of 42 cents. Analysts polled by Thomson Reuters had expected the company to earn to 35 cents.

“I am pleased with the progress we made this year,” James P. Gorman, the chief executive, said in a statement, “but there is a great deal of work to do across Morgan Stanley’s global franchise as we look to deliver first-class service to our clients and long-term value to our shareholders and employees.”

The bank’s results come just a day after Goldman Sachs reported a sharp drop in fourth-quarter profit. Its earnings fell 53 percent, to $2.22 billion, or $3.79 a share, compared with $4.78 billion, or $8.20 a share, in the period a year earlier.

Since taking over a year ago, Mr. Gorman has been trying to rebuild the bank’s franchise, which was badly bruised during the credit crisis. Morgan Stanley has hired hundreds of traders and poured millions of dollars into the transformation. Most recently, Mr. Gorman has been shaking up the management team. In early January, he named Kenneth M. deRegt to head the fixed-income business and Gregory J. Fleming to run wealth management.

But so far shareholders have not seen much return on the investment. Morgan Stanley’s stock is down more than 5 percent since the beginning of 2010. Shares of the firm, which closed down on Wednesday at $27.75 in the wake of Goldman’s weaker-than-expected results, were up slightly in premarket trading.

Shareholders are paying close attention to compensation. In 2009, the firm paid out 62 percent of its revenue to employees, a move that angered shareholders. But Mr. Gorman called the pay unacceptable and vowed to bring the level down, mapping out a plan in December to reduce compensation for senior executives.

In 2010, Morgan Stanley recorded compensation expenses of $16 billion, up from $14.4 billion a year earlier. That amounted to 51 percent of revenue.

Morgan Stanley’s compensation ratio, while down from last year is still high for a securities firm. By comparison, Goldman set aside $15.38 billion for pay last year, down 5 percent from the $16.19 billion it paid in 2009. The ratio of compensation and benefits to revenue was 39 percent.

In its press release Morgan Stanley said that in recent years it has “fundamentally restructured” the way it compensates employees. Specifically it noted that it has increased deferred compensation and reduced cash bonuses. Deferred compensation is aimed at linking more closely an employee’s performance with that of the firm. For 2010, the firm said the average amount of deferred pay increased to 60 percent last year, compared to 40 percent in 2009. The number rose to 80 percent for members of Morgan Stanley’s operations committee, up from 75 percent.

Goldman showed progress in its three major divisions, with net revenue and pretax income for the full year up in institutional securities, global wealth management and asset management.

The quarterly numbers, too, looked decent. Investment banking reported fourth-quarter sales of $1.76 billion, up 5 percent from a year earlier. But the firm’s trading operation felt the same pinch that took a bite out of Goldman’s earnings. It posted a profit of $854 million, down 27 percent from the period a year earlier.

The firm’s said results included an impairment charge of $126 million related to FrontPoint Partners LLC, a hedge fund owned by Morgan Stanley, which was partly offset by a pre-tax gain of $96 million from the sale of the Firm’s shares of Invesco Ltd.