Morgan Stanley has pulled off a Wall Street magic trick

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It’s the magic trick every Wall Street bank dreams of: make costs disappear while retaining the revenues.

It looks like Morgan Stanley pulled it off. The US investment bank reported earnings on January 17 that beat on the top and the bottom line.

The outperformance was helped by a better-than-expected quarter from the fixed income, currencies and commodities division. Revenues came in at $1.5 billion, well ahead of the $1.01 billion expected by analysts, and down only marginally from the third quarter.

A year earlier, fixed income revenues in the fourth quarter came in at a paltry $550 million.

“Fixed income net revenue was essentially unchanged from the sequential quarter, which is significant as the fourth quarter tends to be seasonally slow,” ratings agency Fitch said in a note.

The bank generated $5.1 billion in FICC revenues in 2016, up from $4.3 billion in 2015.

That performance comes even though the bank slashed a quarter of the division’s headcount in late 2015, and reduced risk-weighted assets dedicated to the unit.

“They appear to have indeed managed to retain revenue while cutting 25% of headcount — i.e. they retained the “right” footprint, it would appear,” Guy Moszkowski, managing partner at Autonomous Partners, told Business Insider. “They felt they were overstaffed and they made the right set of decisions.”

To be sure, Morgan Stanley has benefitted from a broader rebound in fixed income, with the fourth quarter especially strong. At JPMorgan, FICC revenues were up 12% from the year-ago quarter, helping the bank post record fourth-quarter markets revenues. BAML’s FICC revenues increased 31%.

James Gorman

Still, it’s rare that a bank is able to cut staff and assets so dramatically, and go on to a have a better year for revenue.

Asked about the performance on the call by analyst Mike Mayo, CEO James Gorman said it was difficult to say where the revenue gains were coming from.

“I would say that one of the things we’ve been very proud of and very focused on is keeping the global network intact as we’ve restructured and changed our business around the globe,” he said. “And I think that, that global network is accruing benefits to us as we’ve seen others around the globe sort of disrupted or distracted based on events going on.”

The bank has now delivered three consecutive quarters with fixed income revenues above the $1 billion target it has set itself. Moszkowski asked Morgan Stanley CEO Gorman on the earnings call if it was time to raise those goals.

“I think the new team, bringing it together with equities was obviously was obviously a very positive move there,” he said. “And we’d just like to see it play out a little bit. There’s no point getting ahead of ourselves at this point.”

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