Analysts are scrambling to revise their third-quarter profit targets for Morgan Stanley, which reports on Wednesday, after its Wall Street rivals beat estimates on the back of capital gains and compensation cost cuts.

They are expecting the US bank's profits to rise more than eightfold in the quarter. Last November, the bank pledged to boost profits, with chief executive John Mack declaring its performance had lagged the industry. The bank's net profits plunged 83% to $144m (€114m) in the third quarter last year on severance costs and a $1bn charge on the sale of its aircraft financing unit in the first quarter.
One analyst said on Friday he was planning to raise his $1.3bn profit target for the bank in the wake of last week's consensus-beating figures from rivals Goldman Sachs, Lehman Brothers and Bear Stearns. Goldman, which opened Wall Street's latest reporting season, increased net revenues by 2% to $7.5bn but cut its compensation and benefits bill by 4% to $3.5bn. Lehman's compensation costs rose but it matched Goldman by lowering the ratio of compensation to revenues compared with last year. Bear Stearns beat both its rivals in terms of the rate of revenue and profit growth but its compensation bill grew faster, surging one fifth from last year to $1bn. It has been adding staff and is shifting its European headquarters to London to cater for its growing numbers. Analysts said Bear Stearns' higher compensation bill was expected but they do not think it will sustain the rate of cost growth. Morgan Stanley's results come after it instigated the most radical shake-up of its business under Mack's reign. A group of young investment bankers have replaced more senior dealmakers, who have been relieved of management responsibilities to concentrate on advising a few important corporate clients.