Morgan Stanley Beats Estimates, Revenue Falls 13%

Morgan Stanley reported second-quarter earnings and revenue that surpassed analysts’ forecasts even as the bank’s profit fell 13% on a slowdown in trading and deal making amid economic uncertainties and “subdued client activity.”

Net income was $2.2 billion, or $1.24 per diluted share, beating the Refinitiv estimate of $1.15 per share, compared with net income of $2.5 billion, or $1.39 per diluted share, for the same period a year ago, the banks said on July 18. Net revenues came in at $13.5 billion for the second quarter, exceeding the expected $13.08 billion, compared with $13.1 billion a year ago.

“The firm delivered solid results in a challenging market environment,” Chairman and Chief Executive Officer, James P. Gorman, who has announced plans to step down within the next year, said in the statement. “The quarter started with macroeconomic uncertainties and subdued client activity, but ended with a more constructive tone.”

Morgan Stanley's sizable wealth management business, which accounted for nearly 50% of total company revenue in the quarter, increased 16% from a year ago to $6.7 billion as it benefited from higher net interest income. Wealth Management delivered strong net new client assets of $90 billion in the second quarter, the bank said.

“We remain confident in our ability to grow in various market environments while maintaining a strong capital position,” Gorman said.

Shares of Morgan Stanley rose 6.45% after the results, putting them among the S&P 500's top gainers.

Institutional securities

Morgan Stanley, though, is the latest of several big banks to report a slowdown in investment banking and trading. Revenues from those businesses dropped during the last quarter at Citigroup and JPMorgan Chase.

Institutional securities net revenues of $5.7 billion reflected continued “muted activity” in a “less favorable” market environment compared to a year ago,” the bank said in its statement. Advisory revenues decreased from a year ago driven by fewer completed M&A transactions, it said.

Investment banking revenues were overall unchanged from a year ago at $1.08 billion.

Fixed income net revenues were down 31% from a year ago to $1.71 billion, compared to $2.5 billion in the year-ago period, while equity net revenues were down 14% from a year ago “primarily driven by declines in cash and derivative products on lower client activity and lower volatility in the markets,” the bank said.

A round of layoffs triggered $308 million in severance costs during the quarter.

Headwinds

Gorman pointed in the results conference call to “significant headwinds and uncertainties,” including “the ongoing market transition from a high inflation, low rate environment to a higher rate, lower inflation environment.”

He also said that April started “on the heels of the first bank crisis since 2008, which had the “risk of bleeding” into the broader financial system. “Prompt action by regulators in what turned out to be idiosyncratic stories of the failed banks combined with the strength and support from the large U.S. banks help to rebalance the system,” he said.

The US debt crisis was another factor impacting market sentiment during the quarter.

“We found our country moving headlong into a debt selling crisis,” Gorman said. “While our view was it was likely to be resolved, there is no doubt it created unnecessary uncertainty in the markets in April and May.”

Bank lending balances grew by $1.1 billion, driven by mortgages, offsetting paydowns in securities-based lending. Total deposits of $343 billion were up slightly quarter-over-quarter.

Allowances for credit losses on lending commitments increased to $1.4 billion. In the quarter, provisions were $97 million. The increase was driven by a continued negative outlook for commercial real estate and modest portfolio growth. Net charge-offs were $30 million, and were substantially all from a handful of specific loans from the corporate lending portfolio.

$20 Trillion AUM

Gorman also predicted that the Wall Street bank will eventually triple its assets under management to $20 trillion, even as an aggressive push into wealth management failed to make up for lackluster trading activity in the second quarter.

The bank’s wealth management business had become “a pretty much unstoppable force” that, together with its asset management division, would make good on a target for $10 trillion in assets under management and eventually, he said.

“I know people are going to call me crazy, and I know it's the end of my tenure, so I get to do this kind of stuff, he said. “But if you do 5% over 14 years, you end up at $20 trillion.”