Morgan Stanley Wealth Management Counterbalance to Investment Banking Fall

Morgan Stanley reported better than expected fourth quarter earnings before the bell Tuesday despite much lower-than-expected revenue from investment banking. MS received record revenues in wealth management business, which includes online trading platform ETrade, were up 6% to more than $6.6bn. MS’s investment-banking group revenues, which now houses Eaton Vance, dropped 17% to $1.5bn but topped analyst estimates of $1.3bn. Morgan Stanley shares, rose 2.92% to $77.00 premarket. The bank set aside $87 million for credit losses, compared with just $5 million in the same quarter a year ago.

Morgan Stanley

$MS released earnings along with major competitor Goldman Sachs and after four of the largest U.S. lenders JP Morgan, Wells Fargo, Citigroup and Bank of America.

Morgan Stanley Q4 2022 Earnings

Q4 2022 earnings release at 7:30 a.m. ET; conference call at 9:30 a.m. ET

  • Net income fell to $2.11 billion, or $1.26 per share, from $3.59 billion, or $2.01 per share, a year ago, but it topped an analyst estimate of $1.19 a share from Refinitiv.
  • Adj EPS 1.31$ (est $1.23)
  • Net Revenue $12.70B (est $12.43B)
  • Increase in net interest income on higher interest rates and bank lending growth
  • Wealth management business record net revenue of $6.63 billion, 6% higher than a year ago.
  • Trading revenue also rose, climbing to $3.02 billion from $2.39 billion a year ago.
  • Equities Sales & Trading Rev $2.18B (est $2.40B)
  • FICC Sales & Trading Rev $1.42B (est $1.68B)
  • Equity revenue fell 24% from a year ago, driven by markdowns on certain strategic investments and lower brokerage balances. Fixed income net revenue was up 15% from a year ago, reflecting stronger results in macro and credit products.
  • Severance costs of $133 million
  • Bank set aside $87 million for credit losses, compared with just $5 million in the same quarter a year ago.

MS: Stock Market Reaction

  • $97.71 ▲ +6.05 (+6.60%) Morning
  • 49.385 ▲ +3.58 (+3.9%) YTD
  • 49.385 ▼ -1.29 (-1.3%) Over year
  • 49.385 ▲ +40.23 (+70.01%)  Over 5 years
  • 52wk High $109.73
  • 52wk Low $72.05

“We reported solid fourth-quarter results amidst a difficult market environment,” Gorman said in a statement. “Overall, 2022 was a strong year for the firm . . . Wealth management provided stability with record revenues and over $310 billion in net new assets.”

Investment Banking Losses

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.

MS Q4 Highlights

The firm’s investment banking suffered a big slowdown amid a collapse in IPOs and debt and equity issuance.

  • Revenue from investment banking $1.25 billion in the fourth quarter, down 49% from a year ago.
  • Substantial decline in global equity underwriting volumes and lower completed M&A transactions.
  • Morgan Stanley’s investment management division revenue of $1.46 billion, 17% decline from a year ago.
  • Bank’s assets under management shrank to $1.30 trillion from $1.57 trillion last year.

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.

Higher rates increase margins

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 ion activity. For banks this means the fee income from home lending has fallen right off.

Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.

FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.

Analysts Outlook on Banks

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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