Morgan Stanley’s MS-N profit beat expectations as wealth management revenue climbed in the first quarter, offsetting slumps in investment banking and trading.
The bank earned $1.70 per share, beating analysts’ average estimate of $1.62 per share, according to Refinitiv data. But its shares fell 1 per cent to $88.92 in early trading on Wednesday as investment banking revenue fell 24 per cent to $1.25-billion and trading revenue also slid.
The Wall Street powerhouse set aside $234-million in the quarter to cover bad loans, rising from $57-million a year ago, as it braced for a recession and weakness in the commercial real estate market. The provisions were linked to a handful of loans.
Wealth management revenue jumped 11 per cent to $6.6-billion versus a year earlier. The division brought in $110-billion in net new assets, of which only about $20-billion came from regional banks in response to the March banking crisis, Chief Financial Officer Sharon Yeshaya told Reuters in an interview.
“We are not in a banking crisis, but we have had, and may still have, a crisis among some banks,” Morgan Stanley CEO James Gorman told analysts on a conference call after the results were announced. Regulators stemmed the damage from the latest turmoil, which Gorman said was not “remotely comparable” to the 2008 mortgage crash.
The CEO, known for a string of transformational deals, said Morgan Stanley will continue to make acquisitions in wealth management, but said a transaction was not imminent.
The decline in investment banking activity for Morgan Stanley, which forms the core of the bank’s business, dragged total revenue down nearly 2 per cent to $14.5-billion in the quarter.
Investment banking revenue was better than expected but still low, Oppenheimer analyst Chris Kotowski wrote in a note to clients.
“While the key investment banking and asset management fee lines are under pressure given the environment, a 16.9 per cent return on tangible equity is a very respectable performance,” Kotowski wrote.
Wall Street’s investment banks have suffered the most from a downturn in mergers and acquisitions as investors grew more cautious about volatile markets and rapidly rising interest rates. Initial public offerings reached a virtual standstill as startups put off market debuts until investor sentiment improves.
Global mergers and acquisitions activity shrank to its lowest level in more than a decade in the first quarter of 2023, with volumes slumping 48 per cent to $575.1-billion as of March 30, compared to a year earlier, according to data from Dealogic.
“The outlook for the remainder of this year is difficult to predict,” Yeshaya said. “We are keenly aware that opening and functioning markets and economic stability are integral in aiding confidence moving forward.”
Stock trading revenue sank 14 per cent as equity markets fell, while fixed income revenue slid 12 per cent.
Rival Goldman Sachs Group Inc GS-N also reported a slump in its investment banking unit as deal making and bond trading slumped and it lost money on the sale of some assets in its consumer business.
Meanwhile, banking giants JPMorgan Chase & Co JPM-N, Bank of America Corp BAC-N and Citigroup Inc C-N reaped windfalls from higher interest payments, while setting aside billions of dollars to prepare for a worsening economy.
Some of the largest U.S. banks also singled out office commercial real estate last week as an area of growing concern, with property values falling and more borrowers defaulting on their loans amid rising interest rates and a slowing economy.
While investment banks like Morgan Stanley and Goldman remain relatively insulated from the broader contagion worries of the crisis, the uncertainty has weighed on the economic outlook, which is key for deal making.
Profit applicable to the bank’s common shareholders for the three months ended Mar. 31 fell 20 per cent to $2.8-billion.