Morgan Stanley Investment Banking Drags Down Earnings

Morgan Stanley reported worse than expected third quarter earnings before the bell Friday with much lower-than-expected revenue from investment banking. MS’s investment-banking group did $1.28 billion in revenue in the third quarter, down 55% from a year earlier. Revenue from Morgan Stanley’s trading business rose slightly, with fixed income surging 33%. Interest income in its wealth-management business rose to $2 billion. Morgan Stanley shares, already down 19% this year fell 2.92% to $77.00 premarket.

Morgan Stanley

$MS released earnings ahead of major competitor Goldman Sachs and four of the largest U.S. lenders JP Morgan, Wells Fargo, Citigroup and PNC. Again, this quarter Morgan Stanley’s trading segment helped out as fixed-income revenue surged amid heightened volatility and clients repositioning their books as interest rates surged higher across the curve.

Morgan Stanley NYSE: MS Reported Before Open Friday

$1.53 beat $1.52 EPS BUT $13.0Bil Missed $13.24 Billion Forecast in Revenue

Morgan Stanley Earnings

Q3 2022 earnings release at 7:30 a.m. ET; conference call at 9:30 a.m. ET

  • Net income dropped 29% to $2.63 billion, or $1.47 a share.
  • Adj EPS $1.53 (est $1.51)
  • Revenue $13.0B (est $13.25B)
  • Trading revenue totaled $4.64 billion
  • FICC Sales & Trading Revenue $2.18B surging 33% (est $1.97B)
  • Equities Trading Revenue $2.46B (est $2.69B)
  • Net Interest Income $2.51B (est $2.37B)
  • Wealth-management revenue of $6.12 billion, up 3.1% from a year earlier.
  • Net interest income in wealth-management $2 billion
  • Net new asset flows dropped 52%.
  • Investment-management arm posted $1.17 billion of revenue, down 20%.
  • Investment-banking group $1.28 billion in revenue in the third quarter, down 55% from a year earlier.
  • ROTCE of 14.6%, or 15.2% excluding the impact of integration-related expenses.
  • $MS Pre-market $77.00−2.32 (2.92%)

“This is a strong and stable result in a difficult environment,” Chief Financial Officer Sharon Yeshaya said in an interview.

Investment Banking Losses

We had been warned about banking losses but there were worse than expected. Morgan Stanley’s investment-banking group posted $1.28 billion in revenue in the third quarter, down 55% from a year earlier. Investment bankers’ clients are putting off stock and debt sales while waiting for a warmer reception from investors as the Fed raises rates aggressively.

MS Q3 Investment Banking

  • Investment-banking group $1.28 billion in revenue down 55% from a year earlier.
  • Revenue from equity underwriting collapsed 78% to $218 million
  • Debt underwriting slumped 35% to $366 million.
  • Mergers-and-acquisitions bankers, with advisory revenue dropping 46%.

Morgan Stanley is also leading the effort to provide financing for Elon Musk’s rekindled Twitter Inc bid for $44 billion. The debt commitment was provided when markets were stronger and the banks working on the deal now risk losing at least several hundred million dollars on the buyout package. The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Justice Department Probe

Morgan Stanley in August placed one of its equity-syndicate bankers Charlie Leisure on leave as it deals with a US Justice Department probe into its block-trading business. The action against Leisure came nine months after his Morgan Stanley superior Pawan Passi was also put on leave. Passi was the head of the US equity-syndicate desk and led the bank’s communications with investors for equity transactions.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.

Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Higher rates increase margins

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

E Trade and Eaton Vance Aquisition’s

Morgan Stanley’s acquisition of E*TRADE continues reward the banks as the record-setting stock market is drawing in waves of new capital to the online brokerage company. The bank spent $13 billion to acquire E-Trade to further its reach with the mass affluent, and $7 billion to buy Eaton Vance to bulk up its investment management business.

On Feb. 20, 2020, Morgan Stanley agreed to acquire E-Trade Financial (ETFC) in a $13 billion, all-stock deal. The Wall Street investment bank said the purchase would add E-Trade’s consumer-oriented business to its advisor-driven model. The deal closed in Q4, 2020

Wealth management, which Morgan Stanley expanded through the acquisition of ETrade, increased revenues.

From The TradersCommunity Research Desk

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