Morgan Stanley’s earnings are hit by bond trading slump

Morgan Stanley’s earnings dropped 42 percent in the third quarter, more than analysts forecast, as the bank’s bond trading business weakened.

The New York-based investment bank and wealth advisory firm earned $939 million after payments to preferred shareholders for the three-month period ending in September, the bank said Monday, compared with $1.63 billion a year earlier.

On a per-share basis, the bank earned 48 cents per share, compared with 84 cents a year earlier. That was far below the 67 cents per share that analysts were looking for, according to FactSet.

Turbulence in financial markets last quarter caused major U.S. banks to report drops in quarterly earnings, and Morgan Stanley was no exception. The bank’s institutional securities division, which includes Morgan Stanley’s investment banking and trading operations, had net income of $688 million in the quarter, down by nearly half from $1.2 billion a year earlier.

Most of that drop could be attributed to the bank’s bond trading operations, which had net revenue of $583 million versus $997 million the year before. Corporate bond underwriting was also down.

“The volatility in global markets in the third quarter led to a difficult environment,” James Gorman, Morgan Stanley’s chairman and CEO, said in a statement.

The bank set aside $3.4 billion for employee compensation this quarter, down from $4.2 billion a year earlier, as a result of the struggling markets. Like other investment banks, Morgan Stanley’s employees are largely paid for performance so it’s not a surprise that pay would drop this quarter.

An oasis of stability in Morgan Stanley’s results was its wealth management business, which includes the Smith Barney franchise. Wealth management had net income of $824 million versus $800 million a year earlier. Since the financial crisis, Morgan Stanley has been diversifying into businesses that would continue to generate revenue in a recession like wealth management.

Overall, Morgan Stanley’s revenue was $7.8 billion compared with $8.9 billion the year before.

Morgan Stanley shares sank $1.77, or 5.2 percent, to $32.19 in pre-market trading.