Morgan Stanley hit as trading slides Morgan Stanley said its second-quarter profits halved following a slump in trading activity, causing it to miss analysts" diminished earnings expectations. Net income from continuing operations in the three months to June was $563m, or 28 cents a share, compared with $1.22bn, but a loss of 36 cents a share, in the same period the year before, the bank said on Thursday. Excluding the impact of an accounting quirk tied to the value of the bank's own debt, which added $350m of revenue to the company's results in the second quarter, earnings per share were just 16 cents. That was far below the 29 cents expected by analysts. Relatively impressive first-quarter results had raised investor hopes that Morgan Stanley was successfully coping with lower trading volumes, a dearth of big capital markets deals and new financial regulations, and was still able to generate returns. But much weaker trading activity and a Moody's downgrade of the bank's credit rating combined to create a 23 per cent drop in net revenues to $7bn. "The results reflect a challenging macroeconomic backdrop with tough comparisons to our very exceptional first quarter," Ruth Porat, chief financial officer, said on Thursday in an interview. But "we're not standing still," she added. Under the leadership of James Gorman, chief executive, the company has been cutting costs and reducing its dependence on volatile trading and investment banking revenue by expanding its wealth management business through a joint venture with Citigroup known as Morgan Stanley Smith Barney. In wealth management, which includes the Morgan Stanley Smith Barney business, pre-tax earnings rose almost a quarter to $393m. The company has said it intends to exercise its right to purchase an additional 14 per cent stake in Smith Barney, though Citigroup said earlier this week that the two had disagreed over pricing. But pre-tax income from the bank's institutional securities division, where it trades stocks and bonds on behalf of clients, fell to $508m from $1.49bn in the second quarter of last year. Advisory revenue from deals slumped 50 per cent to $263m. "Several potholes appeared along the road to recovery including Moody's multiple-notch downgrades of big banks and brokers, continued uncertainty around the eurozone situation, and the formal introduction of beefed-up capital requirements for US banks," CreditSights analysts said in a note to clients ahead of the results. Morgan Stanley was last month downgraded two notches from A2 to Baa1 by Moody's. While the bank escaped the three-notch downgrade some investors had feared, the cut nevertheless prompted speculation about the bank's vast derivatives business. The company said on Thursday that it could have to stump up an extra $6.3bn worth of collateral to its derivatives parties, following the Moody's downgrade. About $2.9bn of the total collateral has already been called and posted. The uncertainty caused by the Moody's review, which was concluded in June after being extended by a month, cost the bank's bond trading division about $225m, Ms Porat said. "Some clients adopted a wait-and-see approach," she said, and the company's bankers had to spend more of their time discussing the review with clients.