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Weak markets leave Morgan Stanley struggling to reach return-on-equity target

* Q1 EPS 55 cents vs. est. 46 cents

* Rev $7.79 bln vs. est. $7.87 bln

* ROE 6.2 pct, short of target

* Shares (Berlin: DI6.BE - news) down slightly in afternoon trading (Updates stock price, adds Gorman comment on cost-cutting)

By Olivia Oran and Richa Naidu

April 18 (Reuters) - Morgan Stanley (Xetra: 885836 - news) 's trouble growing revenue in weak markets may prompt management to take further actions to achieve financial goals, Chief Executive James Gorman said on Monday.

His comments came after the Wall Street bank released first-quarter results showing that its profit tumbled by more than half. Trouble in fixed-income markets cut deep into Morgan Stanley's trading revenue. The business of underwriting stocks and bonds was also difficult.

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Sliding commodity and oil prices, worries about the Chinese economy and uncertainty about U.S (Other OTC: UBGXF - news) . interest rates scared off traders, investors and companies hoping to issue debt or list on stock exchanges early in the quarter.

Morgan Stanley's return-on-equity, a key measure of how well it uses shareholder capital to earn profits, was 6.2 percent, well below Gorman's goal of 9 percent to 11 percent by the end of next year.

"It (Other OTC: ITGL - news) must be said that if these markets were to continue as is, our goals would be extremely difficult to achieve and we would therefore take additional appropriate actions," Gorman said on a conference call with analysts.

He later added that Morgan Stanley's shareholder return was "not acceptable" and that the bank might need to get "much more aggressive" on cost cutting.

Analysts were initially bullish on Morgan Stanley's results because it beat their subdued expectations by a wide margin. But as the call went on, Gorman and Chief Financial Officer Jon Pruzan were hammered with questions about how it will achieve its financial goals if market conditions do not improve.

Morgan Stanley shares were down 15 cents at $25.61 in midday trading. The stock fell about 21 percent in the quarter - the sharpest decline of any big U.S. bank.

Stephen Biggar, an analyst at Argus Research, said it would be "very difficult" for Morgan Stanley to achieve the return-on-equity target Gorman has set out with revenue as weak as it was last quarter.

CHANGING FOCUS

Morgan Stanley is not alone in struggling to grow revenue in weak markets, though its profit problems are more severe than rivals that are larger and can lean on other businesses to buoy results.

Last week, JPMorgan Chase & Co (Xetra: 850628 - news) reported a 7 percent decline in quarterly profit, while Bank of America Corp reported an 18 percent drop and Citigroup Inc (NYSE: C - news) 's earnings fell 27 percent. The declines were attributed in part to trading difficulties. Morgan Stanley's most comparable rival, Goldman Sachs Group Inc, will report results on Tuesday.

Morgan Stanley and its peers have increasingly focused on expenses to make up for weak revenue.

The bank said in January it was looking to save up to $1 billion by 2017 through technology and moving jobs to less expensive locations. Overall, it cut expenses by 14 percent during the first quarter.

In an interview, Pruzan told Reuters most of the cost-cutting last quarter came from "tightening up discretionary spending." More cuts are on the way, but it will take time for them to be reflected in earnings, he said.

The bank also plans to move more back-office staff to low-cost locations. About 40 percent of Morgan Stanley's back-office employees currently sit in lower-cost locations. Pruzan said the bank would like to increase this to 50 to 55 percent.

"There are areas that are starting to take shape but we'll see the actual savings from those towards the end of the year and next year."

Overall, Morgan Stanley's earnings applicable to common shareholders fell 54.4 percent to $1.06 billion, or 55 cents per share, from a year earlier, when the bank reported its most profitable quarter since the financial crisis.

Analysts on average had expected earnings of 46 cents per share, according to Thomson Reuters I/B/E/S.

Net (LSE: 0LN0.L - news) revenue fell 21.3 percent to $7.79 billion, missing the average estimate of $7.87 billion.

The bank's adjusted revenue from fixed income and commodities trading slid 54.1 percent in the quarter. Equities trading revenue fell 9.3 percent.

Morgan Stanley has been shifting its focus away from more volatile areas of trading and toward more stable and less capital-intensive businesses, like wealth management.

Wealth management revenue fell 4.3 percent to $3.67 billion during the quarter, but this accounted for 47 percent of net revenue compared with 39 percent in the same period of 2015.

Investment banking revenue, which includes fees from mergers and income from equity and debt underwriting, fell 18.4 percent to $1.11 billion.

Industry-wide, investment banking fees fell 29 percent in the period, the worst first-quarter since 2009, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

However, there were some signs of hope. Gorman said there has lately been a "slightly better turn in markets," that its M&A pipeline is strong and there are some "green shoots" in the equity underwriting calendar.

(Reporting by Olivia Oran and Richa Naidu; Additional reporting by Sudarshan Varadhan; Editing by Ted Kerr, Lauren Tara LaCapra and ALan Crosby)