Morgan Stanley beats estimates as wealth management shines, but shares slip

Morgan Stanley’s (MS.N) first-quarter profit topped estimates as wealth management revenue rose, but shares fell as investment banking and trading revenue fell.

Refinitiv data shows the bank earned $1.70 per share, above analysts’ average expectation of $1.62. Midmorning trade down 0.5% to $89.37.

As it prepared for a recession and commercial real estate market downturn, the Wall Street giant set aside $234 million in the quarter to cover bad loans, up from $57 million a year earlier. A few loans triggered the provisions.

Wealth management sales rose 11% to $6.6 billion. Chief Financial Officer Sharon Yeshaya told Reuters that the business added $110 billion in net new assets, only $20 billion of which came from regional banks.

“We are not in a banking crisis, but we have had, and may still have, a crisis among some banks,” Morgan Stanley CEO James Gorman told analysts on a conference call after the results. Gorman said the present turbulence was not “remotely comparable” to the 2008 mortgage meltdown. Regulators limited the harm.

The CEO, famed for transformational deals, said Morgan Stanley will continue to make wealth and asset management acquisitions, but no deal is imminent.

Investment banking revenue fell roughly 2% to $14.5 billion in the quarter.

Oppenheimer analyst Chris Kotowski told clients investment banking revenue was higher than projected but still low.

“While the key investment banking and asset management fee lines are under pressure given the environment, a 16.9% return on tangible equity is a very respectable performance,” Kotowski noted.

As investors were wary of turbulent markets and rising interest rates, mergers and acquisitions fell hardest for Wall Street’s investment banks. Startups delayed market debuts until investor mood improves, halting IPOs.

In the first quarter of 2023, global mergers and acquisitions activity fell 48% to $575.1 billion, according to Dealogic data.

As equity markets collapsed, stock trading revenue plummeted 14% to $2.7 billion and fixed income revenue fell 12% to $2.5 billion.

Yeshaya added, “This year’s outlook is uncertain.” “We are keenly aware that opening and functioning markets and economic stability are integral to aiding confidence moving forward.”

Gorman anticipated two more Fed rate hikes to 5%–6%. “If we get through that, many people are calling for a modest recession,” he remarked, encouraging an economic comeback.

The CEO cited commercial real estate downturn, geopolitical conflict, banking sector stress, and uneven global economic growth.

“It kind of reminds me of the Rolling Stones song, you can’t always get what you want, but you get what you need,” he remarked.

Goldman Sachs Group Inc. (GS.N) also saw its investment banking segment decline as dealmaking and bond trading fell and it lost money selling consumer business assets.

JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), and Citigroup Inc (C.N) made billions from increased interest payments while preparing for a weaker economy.

Commercial property concerns
Last week, some of the major U.S. banks also highlighted office commercial real estate as a significant worry, with property prices decreasing and more debtors defaulting amid rising interest rates and a sluggish economy.

While Morgan Stanley and Goldman remain largely protected from the crisis’s contagion worries, the uncertainty has dragged on the economic outlook, which is crucial for dealmaking.

The bank’s common shareholder profit for the three months ending Mar. 31 plummeted 20% to $2.8 billion.