Morgan Stanley, even while beating analysts' expectations with its quarterly results, couldn't quite replicate bigger rival Goldman Sachs' success in emerging from the sub-prime mortgage crisis relatively unscathed. The New York-based bank reported a 57 per cent drop in second quarter earnings as revenue from asset management and investment banking declined while equities and fixed-income traders generated less profit.

Net income fell to $1.03 billion, or 95 cents a share, from $2.58 billion, or $2.45, a year ago. Revenue fell 38 per cent to $6.51 billion in the three months ended 30 May and the firm's annualised return on equity, a measure of how well shareholders' money is reinvested, declined to 12.3 per cent from 29.4 per cent a year ago. That compares with Goldman Sachs' second-quarter return on equity of 20.4 percent.

Morgan Stanley's fixed-income revenue decreased 85 per cent to $414 million, after losses of $436 million on mortgage- related trades and $519 million from leveraged loans and related hedges. In comparison, Goldman Sachs' dropped 29 per cent to $2.38 billion. (See: Goldman Sachs confuses analysts with better-than-expected quarterly results)

The company, the second largest investment bank after Goldman Sachs, received a big boost from two one-time items: a $698 million pretax gain from the sale of its Spanish wealth management business and a $732 million pretax gain from the secondary offering of MSCI Inc.

Gains from asset sales helped offset $245 million of severance related to job cuts, $436 million of losses from proprietary mortgage trades and $519 million of net losses on leveraged loans.

Morgan Stanley said the actions of a single London trader who violated company policies resulted in a $120 million write-down. The trader has been suspended and a full internal review is occurring, Morgan Stanley CFO Colm Kelleher said on a conference call, adding that it was an isolated situation.

The equity trading division, which produced a record $3.3 billion in the first quarter, reaped $2.1 billion in the second quarter, an 11 per cent decrease from a year earlier. Investment banking revenue, which includes merger advisory fees and income from underwriting stock and bond offerings, fell 49 per cent to $875 million.

Morgan Stanley advised on $191 billion worth of takeovers completed during the three months ended 30 May, down from $287 billion in the same period a year earlier. Asset management revenue fell 68 per cent to $488 million even as funds under management advanced 8 per cent to $605 billion.

The investment bank's pending deals, a measure of potential future banking earnings, rose in the second quarter, Kelleher said. Morgan Stanley's asset management business experienced inflows of client cash, even as many competitors saw outflows.

Revenue from global wealth management, the firm's retail brokerage unit, rose 48 per cent to $2.43 billion, because of the sale of the Spanish unit. Excluding the sale, revenue increased 4 per cent.

Shares of Morgan Stanley have fallen 28 per cent this year, lagging the Amex Securities Broker-Dealer Index .XBD and the broader S&P 500 Index.

Morgan Stanley's book value, or assets minus liabilities, was $30.11 per share at the end of the quarter. Morgan Stanley's shares trade at about 1.3 times their book value, less than Goldman's 1.8, but above Lehman's 0.7.

The company's shares were down $1.35, or 3.4 per cent, at $39.25 on the New York Stock Exchange.