Morgan Stanley reported better than expected third quarter earnings and revenue before the bell Tuesday. However in comparison to its peers and metrics such as net interest income falling short of forecasts the stock was sold off. The bank’s investment-banking revenue was weaker than forecasts, again an area where it’s competitors had found some recovery in this quarter. Morgan Stanley’s stock was down almost 8% in morning trading, which is on track for its largest one-day percentage drop since June 11, 2020, when it fell 8.5%. Another concern was MS’s 13.5% return on average tangible common equity fell short of the bank’s long-term target of 20%.
Uncertainty of the bank is in the midst of a leadership transition, with Gorman planning to step down by next May also leaves a question mark.
Morgan Stanley released earnings after major competitor Goldman Sachs who reported yesterday. Four of the largest U.S. lenders PNC, JPMorgan, Wells Fargo, Citigroup and Bank of America have also reported all beating consensus other than PNC.
Morgan Stanley Q3 2023 Earnings
Q3 2023 earnings release at 7:30 a.m. ET; conference call at 9:30 a.m. ET
- Earnings per share: $1.38, vs. $1.28 estimate from LSEG, formerly known as Refinitiv
- Revenue: $13.27 billion, vs. expected $13.23 billion
- Trading revenue rose 10% in the quarter to $3.68 billion.
- FICC Sales & Trading Revenue: $1.95B billion (exp $1.92B)
- Equity Trading Revenue: $2.51 billion (exp $2.41B)
- Wealth management 6.4 billion in revenue.
- Net interest income sank 9% from the second quarter
- Asset-management revenue increased by 6% to $5.03 billion
- Investment-banking revenue dropped 24% to $1.05 billion.
- Repurchased $1.5B Of Stock During Quarter
- Market Environment Remains Mixed This Quarter
MS: Stock Market Reaction
- $74.11 ▼ -6.22 (-7.75%) today
- $74.11 ▼ -5.31 (-6.68%) past year
- $74.11 ▲ +30.21 (+68.71%) past 5 years
- 52wk High $100.99
- 52wk Low $73.40 (today)
Investment Banking Losses
Higher interest rates and concerns about a possible recession are hurting the desire for deals or taking companies public. That slowdown, which started last year, has lasted longer than many bankers had expected. Investment-banking revenue dropped 24% to $1.05 billion for MS in the third quarter.
On a conference call with analysts, Morgan Stanley said it sees a strong pipeline of deals, but not until early 2024. That means the fourth quarter is not expected to provide a boost against the worsening geopolitical situation in the Middle East.
We had been warned about banking losses, investment bankers’ clients are putting off stock and debt sales while waiting for a warmer reception from investors as the Fed raises rates aggressively.
Higher rates increase margins but at a cost.
The Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing banks to generate more profit from their core activities of taking in deposits and making loans. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.
However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically in activity. For banks this means the fee income from home lending has fallen right off.
Morgan Stanley’s net interest income missed analyst expectations by 6 cents a share in the third quarter and its investment-banking revenue was weaker than forecasts.
Outlook
Morgan Stanley Chief Executive James Gorman said on the earnings call; “Our equity and fixed-income businesses navigated markets well, and both wealth management and investment management produced higher revenues and profits year over year”.
When people have a choice of making a 4%, 5% return by doing nothing, they’re not going to be trading in the markets,” Gorman said.
Transition to New CEO
In May, Gorman announced his plan to resign within a year, capping a successful tenure marked by massive acquisitions in wealth and asset management. Morgan Stanley’s board has narrowed the search for his successor to three internal executives, he said at the time. Three potential successors at the bank include Andy Saperstein, who heads up wealth management; Ted Pick, who runs capital markets; and Dan Simkowitz, head of investment management.
Gorman reiterated his desire to hand over the CEO position to a successor within months.
“This firm is in excellent shape notwithstanding the geopolitical and market turmoil that we find ourselves in,” Gorman said. “My hope and expectation is to hand over Morgan Stanley with as clean a slate as possible and deal with a few of our outstanding issues in the next couple of months.”
E Trade and Eaton Vance Aquisition’s
Morgan Stanley through E*Trade continued to attract retail-trading customers. Those customers numbered 8.1 million at the end of March, up from 7.6 million a year prior. However, those customers are trading less often. The average daily number of retail trades the company handled was about 831,000, down from more than 1 million a year ago.
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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