By Matt Scuffham and Sohini Podder

(Reuters) -Morgan Stanley reported fourth-quarter profit which beat market expectations, outperforming rivals as its focus on advising wealth clients bore fruit, sending its shares up as much as 3.7% on Wednesday.

The Wall Street investment bank also benefited from a boom in global dealmaking and keeping expenses in check at a time when its peers had been hampered with rising wages and technology costs.

Full-year profit as well as revenue was a record for the bank, which advised on some of the world’s biggest mergers during the year. Net income surged 37% to $15 billion and revenue jumped 23% to nearly $60 billion.

The bank also lifted its long term target for return on tangible capital equity (ROTCE), a key metric which measures how well a bank uses shareholder money to produce profit. It is targeting ROTCE of at least 20%, up from 17% previously.

“We are increasing our ROTCE goal to reflect the earnings power we see in our business model,” Chief Executive James Gorman told analysts on a conference call.

Since taking over a decade ago, the 63-year-old CEO has transformed Morgan Stanley from a Wall Street firm heavily weighted in money-losing trading businesses into a more balanced bank. He was the driving force behind Morgan Stanley’s decision to acquire Smith Barney, and made wealth management the cornerstone of his plan to stabilize revenue.

The 2020 acquisitions of E*Trade and Eaton Vance for a combined $20 billion doubled down on that strategy, differentiating Morgan Stanley’s focus from its peers.

The bank’s wealth management unit delivered a 10% rise in revenue to $6.25 billion powering a record annual profit.

In the quarter ended Dec. 31, profit rose to $3.59 billion, or $2.01 per share and was above market expectations of $1.93 per share

Shares in Morgan Stanley were up 2.5% in morning trading.

Its results rounded out a mixed earnings season for the nation’s largest banks that cashed in on the M&A wave, but were dragged down by weak trading and higher expenses, which swelled as they spent heavily to retain key personnel in a race for talent.

Morgan Stanley’s traditional rival, Goldman Sachs on Tuesday reported fourth-quarter profit which missed expectations, sending its shares down as much as 8%. JPMorgan beat profit expectations last Friday but saw its shares fall 6% on expense concerns.

In contrast to some rivals, Morgan Stanley had benefited from bringing technology in-house through its acquisitions rather than having to build it from scratch, Gorman told analysts.

It has also linked pay with performance in its wealth management and investment banking divisions, Gorman said.

Compensation expense was roughly flat during the quarter compared with a year ago.

HEALTHY PIPELINE

Morgan Stanley’s investment bank produced a strong performance and Chief Financial Officer Sharon Yeshaya said its pipeline remained “healthy” going into 2022.

“CEO confidence remains high, and markets remain open and constructive,” she told analysts.

In 2021, Wall Street investment banking giants benefited from a global dealmaking boom.

Morgan Stanley advised on 420 deals last year and was ranked third in the global investment banking league tables, following larger rivals Goldman Sachs and JPMorgan Chase, according to data from Dealogic.

Overall revenue from institutional securities, which houses the Morgan Stanley’s investment banking and trading units, fell slightly to $6.7 billion, mainly due to weak trading.

Revenue from trading fell 26%. Equity trading revenue rose 13%, but the gains were wiped out by a 31% slump in fixed income trading revenue to $1.23 billion.

Overall revenue rose to $14.5 billion compared with $13.6 billion a year ago.

(Reporting by Sohini Podder and Manya Saini in Bengaluru and Matt Scuffham in New York; additional reporting by Mehnaz Yasmin; Writing by Anirban Sen and Matt Scuffham; Editing by Arun Koyyur and Nick Zieminski)

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