Investment banking giant Morgan Stanley just released its latest Q1 report, and it exceeded many analysts’ expectations due to increased revenue from wealth management, counterbalancing a decline in investment banking and trading.
However, its profit has plunged 19% to $3 billion. Nevertheless, this is still quite the success against the $2.8 billion estimation as the M&A market — the bank’s main alley of revenue — is not as robust as in 2022.
Morgan Stanley's first-quarter earnings surpassed analysts' average estimate of $1.62 per share, with the bank earning $1.70 per share, driven by strong performance in its wealth management unit.
The firm’s wealth management unit saw an 11% increase in revenue and netted $110 billion in new assets, with only $20 billion from regional banks in response to the March banking crisis.
"In periods of challenges within the broader economic environment, we continue to be a destination of choice for our clients and their assets," said CFO Sharon Yeshaya to Reuters in a recent interview.
Yeshaya attributed the majority of the new assets to the bank's investments paying off. “The durability of our business model is being shown through our results,” she said.
"In periods of challenges within the broader economic environment, we continue to be a destination of choice for our clients and their assets."
Sharon Yeshaya, CFO of Morgan Stanley
However, the Wall Street powerhouse's investment banking and trading units experienced declines in revenue, with investment banking revenue falling 24% to $1.25 billion.
As a result, shares fell over 3% to $86.81 in premarket trading on Wednesday. The bank's total revenue fell by almost 2% to $14.5 billion due to a decline in investment banking activity, which is its main business.
Despite this, the bank has set aside $234 million to cover souring loans, linked to a few loans, as it prepares for a potential recession and weakness in the commercial real estate market. The bank's provisions for bad loans rose from $57 million a year ago, reflecting its concerns over rising borrowing costs, potential customer defaults, and a possible deterioration in commercial real estate.
Morgan Stanley and other major US banks, including JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, and Wells Fargo & Co, reported profits that exceeded earnings estimates. These banks earned more income due to higher interest rates and remained strong despite the industry turbulence.
Volatile markets
The recent downturn in mergers and acquisitions has hit Wall Street's investment banks the hardest, with investors avoiding risky investments amidst volatile markets and high-interest rates. Startups have delayed their market debuts until investor sentiment improves due to the recent market turmoil that has virtually halted initial public offerings.
In the first quarter of 2023, global mergers and acquisitions activity dropped by 48% to $575.1 billion as of March 30, compared to a year earlier, according to Dealogic data.
Morgan Stanley's rival, Goldman Sachs Group Inc, also reported a slump in its investment banking unit due to weak dealmaking and bond trading and losses in its consumer business. Meanwhile, JPMorgan Chase, Bank of America and Citigroup earned higher interest payments but set aside billions of dollars to prepare for a worsening economy.
Large U.S. banks also identified commercial real estate as an area of concern, with property values decreasing and borrowers defaulting on loans amid rising interest rates and a slowing economy. Morgan Stanley's results capped a turbulent reporting season for Wall Street's largest banks following the March collapse of two mid-sized lenders, which sparked recession fears.
During a conference call with analysts following the announcement of the results, Morgan Stanley CEO James Gorman said that the turmoil caused by the collapse of US regional lenders and Credit Suisse in Europe in March was not comparable to the 2008 mortgage crisis.
"We are not in a banking crisis, but we have had, and may still have, a crisis among some banks," Gorman said, adding that investment banking revenue may not recover until next year after the group's net profits fell almost 20% in the first quarter.