By Liz Hoffman and Peter Rudegeair
Quarterly profit fell 10% at Morgan Stanley, the last of the big U.S. banks to report earnings in a mixed quarter where trading slowed and Main Street banks carried the day.
The bank reported a profit of $2.2 billion, or $1.23 a share, on $10.2 billion in revenue, both down from a year ago. Analysts polled by FactSet had expected a profit of $1.9 billion, or $1.13 a share, on $10 billion in revenue.
Morgan Stanley, the smallest of the major American banks, is the last to report earnings in a tough quarter for high finance. A decline in longer-term interest rates, spurred by the Federal Reserve's recent shift to possibly lower rates, caused some corporate borrowers to pull back. And global trade tensions quieted securities trading, even as stock-market indexes plumbed new highs.
"People don't have much conviction, at these levels, in this rally," said Morgan Stanley's finance chief, Jonathan Pruzan.
Instead, consumer businesses drove higher profits at JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. Morgan Stanley and Goldman Sachs Group Inc., which also lacks a large consumer presence, were the only two big U.S. banks to report quarterly profits that were lower than a year ago.
Morgan Stanley has a giant retail brokerage but lacks the mortgage and credit-card operations that are booming at rivals. Instead, cost control and gains on principal investments -- including a stake in a trading platform that went public in April -- helped paper over weaker results in the firm's trading and investment banking arms.
The bank's return on equity, a measure of profitability, was 11.2%. Other banks ranged from 10% at Citigroup to 16% at JPMorgan.
Chief Executive James Gorman has steered Morgan Stanley into steadier businesses since the financial crisis, doubling down on money management and cutting riskier kinds of trading. Earlier this year he struck a deal to buy a software firm that helps corporate employees manage their finances, and plans to build out Morgan Stanley's retirement-account offerings.
Mr. Gorman said he isn't getting enough credit for that transformation. On Thursday, he took aim at new capital rules that will hit Morgan Stanley harder than some peers. "We're still suffering from the deeds at this firm 10 years ago, and my attitude is we're a very, very different firm now," he said. "This is 2019, not 2009."
The firm kept a lid on expenses, down 3% so far this year, and was particularly tight in allocating bonuses for its bankers and traders, whose total accrued compensation for the year so far is just 35% of the revenue they have made.
The wealth division, which manages about $2.5 trillion for U.S. clients, reported a 2% rise in quarterly revenue to $4.4 billion. Twenty-eight percent of that dropped to the bottom line in profit, a record for Morgan Stanley and above the range Mr. Gorman set out to crack three years ago.
Trading revenue fell 12% from a year ago. Stock trading revenue fell 14% to $2.13 billion, still good for first among big banks. Morgan Stanley jealously guards its pole position in equities, having spent heavily on technology in the early 2010s to dethrone Goldman.
The firm said hedge funds borrowed less in the quarter, a sign they aren't sure enough of which way markets are heading to juice their bets with debt.
Meanwhile, revenue was down 18% in fixed-income trading, where Morgan Stanley is smaller than peers after firing a quarter of the staff in 2016 and trimming assets.
Morgan Stanley's investment-banking revenue fell 13%, though executives said its pipeline of unannounced deals was full. Morgan Stanley is a big merger adviser and stock underwriter, and so tends to feel slowdowns there more acutely than rivals.
Across the industry there were 8% fewer completed M&A deals in the quarter, collectively worth nearly 50% less, compared with a year earlier, according to FactSet. And while a flood of highly anticipated technology companies went public this spring, issuance of secondary shares and convertible bonds has been slower than in 2018.
The biggest gains came from Morgan Stanley's asset-management arm, where revenue grew 21%. Growing that business, which manages just under $500 billion and is a blip on the firm's bottom line, is a priority for Mr. Gorman, who has hinted he would like to do a deal.
Morgan Stanley's total deposits grew 2% to $177 billion while loans grew 4% to $258 billion, led by mortgages. Morgan Stanley has been rebooting its home-lending operation, which was for years a problematic and small business that it outsourced. In 2017 it brought the effort in-house and recently began pricing loans more competitively.
"We slowed it down to make sure that we got it right and now we're in a better position," Mr. Pruzan said Thursday.
The move is part of the firm's push into plain-vanilla banking, to get at what it estimates is $2 trillion that its individual clients keep at other banks. A decade after converting into a bank holding company during the financial crisis, Morgan Stanley still doesn't issue its own credit cards, write many mortgages or offer competitive savings and checking accounts.
The stock closed up 1.5% Thursday.
Write to Liz Hoffman at email@example.com and Peter Rudegeair at Peter.Rudegeair@wsj.com