Morgan Stanley shares rise on higher earnings

• Bond and asset management units boosted bank's earnings
• Excluding widely criticized accounting rule, bank earned $535M
• Morgan moving into less-risky, steadier-revenue brokerage business

NEW YORK (AP) — Morgan Stanley reported higher revenue and net income for its third quarter Thursday, thanks to gains in its bonds and asset management businesses.

Excluding an accounting charge, the bank earned $535 million for common shareholders in July to September, up from $39 million a year ago.

Revenue rose 18% to $7.6 billion, after excluding the charge, beating the $6.4 billion consensus estimate from FactSet.

In pre-market trading, shares of Morgan Stanley (MS) gained 1.3% to $18.74.

If the accounting charge is included, the bank lost $1 billion in the quarter vs. income of $2.2 billion in the same period a year ago, and revenue fell 46% to $5.3 billion.

The charge was related to a controversial accounting rule on how banks value their debt. When the value of a bank's debt rises, the bank takes a write-down because, theoretically, it would have to pay more to buy back its debt on the open market.

Banks and others have criticized the rule as unfair, because it penalizes banks when their value to investors is actually rising. The rule could be phased out as early as next year.

In a statement, CEO James Gorman said the results showed the bank's "balanced, strategically focused" game plan.

This quarter brought a coup for Morgan Stanley, when it muscled through negotiations with Citigroup to buy up the rest of Morgan Stanley Smith Barney, the retail brokerage that it had jointly owned with Citi (C) .

Citi agreed to sell the rest of its stake to Morgan Stanley, but it got far less money than it wanted. As a result, Citi had to take a $4.7 billion writedown when it announced its third-quarter earnings Monday.

Morgan Stanley wants to expand its retail brokerage arm, which is not as glamorous as higher-risk businesses but provides a steadier revenue source.The revenue comes mostly from fees customers pay the bank to manage their money.

Riskier activities, such as trading for Morgan's own account, offers the opportunity for bigger profits. But regulations are crimping that type of trading, which also carries the risk that banks can suffer huge losses when trades or positions in certain assets fail.

The bank is "beginning to unlock the full potential" of the retail brokerage business, Gorman said in a statement.

Revenue tripled in Morgan's asset management unit, which helps sophisticated clients — mostly institutions — invest in private equity, real estate and elsewhere. The bank noted gains in real estate investing and said clients were putting more money into some of its funds.

Revenue rose about 21% in investment banking with clients favoring bonds over stocks. Revenue from trading stocks on behalf of clients fell, but revenue from trading bonds and commodities for clients rose.

The investment bank also helps businesses raise money on the open market, go public, and make decisions about strategy. Morgan Stanley did less business in advising companies. It also brought in less money from underwriting stock offerings. But it more than doubled its revenue from underwriting bonds.

Gorman said clients "have re-engaged after the uncertainty of the rating review in the previous quarter." In June, Moody's Investors Service knocked down its rating of Morgan Stanley debt.

Morgan Stanley has slashed jobs and expenses to cushion against the uncertain economy. It shed about 4,500 jobs over the year, or about 7% of its work force, but it spent more on paying management and employees, though. Compensation and benefits expense rose 8% to $3.9 billion.