(NEW YORK) Morgan Stanley reported better-than expected quarterly profit yesterday on strong fixed income sales and trading revenue and improved investment banking underwriting results, sending its shares up 5 per cent.

The profit stems three straight losing quarters as Morgan Stanley belatedly joins rivals such as Goldman Sachs Group Inc in returning to the black after the collapse of the financial sector a year ago.

New York-based Morgan Stanley reported net income for common shareholders of US$498 million, or 38 US cents a share, in the third quarter. Analysts' average forecast was 27 US cents a share, according to Thomson Reuters.

Scarred by the collapse that claimed competitors such as Lehman Brothers, Morgan Stanley has played a more conservative hand this year and developed its brokerage business. Chief financial officer Colm Kelleher said that the third-quarter results were an affirmation of that strategy.

'The feeling is that we are executing on a strategy,' Mr Kelleher told Reuters. 'It is not so much relief, but an affirmation.'

The results included an accounting loss of US$900 million, or 36 US cents a share, from a rise in the value of the firm's debt.

Writing up debt caused a loss of US$2.3 billion in the second quarter.

Morgan Stanley stashed away about US$5 billion in the third quarter for year-end bonuses, lifting its bonus pool to US$10.9 billion.

Consolidated net revenue in the quarter was US$8.7 billion.

Morgan Stanley shares were up 5 per cent to US$34.17 in morning trade on the New York Stock Exchange.

Morgan Stanley has been dogged by comparisons to chief rival Goldman Sachs over the past year. Goldman last week reported a US$3 billion profit in yet another blockbuster quarter.

Morgan Stanley executives have pleaded for patience as they integrated the Morgan Stanley Smith Barney joint venture, creating the world's largest brokerage.

Morgan Stanley is also immediately reaping benefits from the expansion of its retail brokerage business. The bank acquired a majority stake in Smith Barney from Citigroup in May, and merged the operations with its own wealth management division. The combined operations helped Morgan Stanley nearly double its revenue in that division.

It is widely expected that Morgan Stanley will exercise its eventual option to purchase Citigroup's 49 per cent stake in the venture. -- Reuters, AP