Morgan Stanley
closed large banks’ second quarter earnings season on Wednesday morning with the most significant beat on Wall Street. Though the firm’s results were down from this time a year ago, they underscored that Wall Street’s biggest banks were able to navigate today’s lower for longer interest rate environment and recent jitters in global markets that put a damper on corporate activity and investors’ animal spirits.
Morgan Stanley’s earnings beat was buoyed by stronger than expected fixed income trading results, stable wealth management profits and CEO James Gorman’s solid management of expenses. The results indicate that Gorman’s efforts in revamping the bank’s fixed income division are on track, and that his long-term bet on wealth management is strategically sound. They also indicate investor fears of a sharp slowdown may have run too high.
Overall, Morgan Stanley reported $8.9 billion in revenues and a profit of $1.4 billion, or 75-cents a share. Those earnings reflected a 9% drop on the top line and a 12% decline on the bottom line, but they significantly surpassed analyst estimates of $8.3 billion in revenues and 60-cents in EPS. Morgan Stanley shares, which were down 11% year-to-date, rose nearly 2% in early trading to $28.89.
“Our results this quarter reflect solid performance in an improved but still fragile environment. In the midst of market uncertainty, we maintained our leadership positions across our core franchises and continued our focus on prudent risk management and judicious expense control,” said CEO Gorman, in a statement.
There were no silver bullets in Morgan Stanley’s results that drove the beat. Instead, the bank’s performance across multiple business lines proved more resilient than many analysts expected. “Investors will like the quarter as the top line beat was met with expense control and this led to strong earnings. There is not too much to knock on the quarter and the only open item is whether this quarter’s results are sustainable,” said Brian Kleinhanzl, an analyst at Keefe Bruyette & Woods.
In the firm’s Institutional Clients division, which houses trading and investment banking, revenues fell 11% to $4.6 billion and pre-tax profits declined 7% to $1.5 billion. Those earnings were bolstered by better than expected fixed income trading revenues of $1.3 billion, which fully mitigated the firm’s sale of its oil merchanting business a last year and surpassed some analyst forecasts by as much as 30%.
In investment banking, Morgan Stanley’s equity sales and trading revenues fell 8% to $2.1 billion, while its advisory revenues rose to $497 million on a closing of previous quarters’ deals. But the firm could not blunt the impact of today’s near-frozen IPO market and a slowing of corporate borrowing activity. Equity underwriting revenues fell by nearly half to $266 million, while bond underwriting revenues dropped by 40% to $345 million.
As in previous quarters, Morgan Stanley’s wealth management division was a source of stability and smaller earnings declines. The unit generated $3.8 billion in revenues, a 1% decline, and pre-tax income of $859 million. Morgan Stanley’s pre-tax wealth management profit margins were 22.5%, bolstered by an increase in lending that drove net interest income gains and blunted the impact of falling commissions and asset management fees in today’s jittery market. Wealth management client assets were $2 trillion at quarter end.
One area of protracted weakness for Morgan Stanley is investment management, where revenues declined 22% to $583 million and profits fell by nearly half to $118 million on falling performance fees from alternative investments.
In this tame earning backdrop, CEO James Gorman maintained strong cost discipline. The bank’s compensation expense fell 9% to $4.1 billion in the second quarter and overall non-interest expenses fell 8%.
If the second quarter was a test in how Morgan Stanley would hold up to a tough market, the firm’s results bolster confidence. With dealmaking in a continued rut and IPO markets dripping out new companies, it’s likely many challenges lie ahead for Wall Street powerhouses like Morgan Stanley and Goldman Sachs.
See how other banks performed during the second quarter:
Bank Of America Clears Low Earnings Bar As Expenses Tumble
Wells Fargo’s Profit Slides In Quarter Marked By Increased Lending
Citigroup Profit Falls 14%, But Trading Revenue Rise Drives Earnings Beat
JPMorgan Shrugs Off Brexit With $6.2 Billion Profit On Brexit-Fueled Trading