By Lauren Tara LaCapra
NEW YORK (Reuters) - Morgan Stanley is expected to report bond-trading revenue below the target the Wall Street bank set after its disappointing first-quarter results, an analyst said on Wednesday.
Morgan Stanley will report $1.25 billion in fixed income, currency and commodities (FICC) trading revenue for the second quarter, below the target of $1.5 billion to $2.5 billion the bank recently outlined as necessary to meet its cost of capital, said Richard Staite, an analyst with Atlantic Securities.
The bank has been providing more details about its bond-trading ambitions after disappointing first-quarter FICC revenue caused its shares to drop more than 5 percent on April 18.
Its stock recovered within days, after bank executives told investors, analysts and reporters that the quarter's $1.5 billion in bond-trading revenue was the minimum needed to meet cost of capital, represented by a 10 percent return on equity.
Morgan Stanley has been changing its bond-trading strategy for years, and performance has been rocky. The bank is now in the process of reducing risk-weighted assets by $190 billion - with another $53 billion left to go before the end of 2016 - in response to more stringent capital rules.
As a result, Morgan Stanley no longer has aspirations to have a bond-trading business as large as peers such as JPMorgan Chase & Co and Goldman Sachs Group Inc .
But bank officials argue that shrinking the business will allow it to be profitable. At a conference earlier this month, Chief Executive James Gorman detailed plans to double or triple returns in some areas.
"We fully recognize we are not where we want to be with fixed income and commodities," Gorman said. "On the other hand, we think we've made more progress than perhaps has been understood. But this is a multiyear transformation of a very complex business."
Morgan Stanley shares are up 31 percent this year, making it one of the best performing large bank stocks of 2013. But Staite's report may raise doubts. The analyst estimates Morgan Stanley's return on tangible common equity will be just 6.1 percent in the second quarter.
He said Morgan Stanley "is overvalued, given our view that profitability will remain disappointing."
A Morgan Stanley spokesman declined to comment on the analyst's report but pointed to Gorman's comments earlier this month.
(Reporting by Lauren Tara LaCapra; Editing by John Wallace)