Morgan Stanley’s traders fell short again, dragging down profit at the firm, as its wealth business surged past expectations.
Revenue from the fixed-income trading business was little changed from a year earlier, disappointing analysts who had expected an increase. Net revenue from the wealth unit, meanwhile, totaled $6.65 billion, higher than analysts’ expectations of $6.4 billion. That business has been aided by higher interest rates, which have helped boost net interest income.
“There is strong confidence in the macroeconomic outlook,” CFO Sharon Yeshaya said in an interview, adding that Morgan Stanley is “reaffirming all our financial targets.”
Investors are turning their focus to a revival of key Wall Street operations after a period of rapidly climbing rates fueled big-bank profits with increasing net interest income. The largest U.S. lenders took turns last week warning about the future of their biggest source of revenue, with Wells Fargo & Co. predicting a 9% slide in that key metric this year.
As the Federal Reserve signals it’s close to its peak rate, and bankers tout pent-up demand for mergers and more conducive markets, hopes of an investment-banking revival have taken hold.
This month marks the start of a new era at Morgan Stanley after Ted Pick took over from longtime CEO James Gorman. He takes the helm of a firm that has redefined itself over the past decade but now faces more skepticism from analysts about its ability to keep growing faster than competitors.
Morgan Stanley shares slumped 3% to $87 at 8:56 a.m. in early New York trading Tuesday. Last year, they climbed almost 10%, compared with a decline of nearly 5% for the KBW Bank Index.
Last week, the New York-based firm resolved a long-running investigation into its block-trading business, which had become a successful piece of its prized equities business. The firm agreed to pay $249 million to the U.S. Justice Department and the Securities and Exchange Commission as part of the resolution.
Read More: Morgan Stanley to pay $249 Million to end block-trade probes
Despite beating analysts’ estimates, net new assets in the wealth unit remained under $50 billion for a second straight quarter. That pace would leave Morgan Stanley shy of the more than $300-billion-a-year target it has sought to grow the business.
“We’ve always said it would be lumpy,” Yeshaya said. “What’s most interesting to me is that net new assets are coming from new clients.”
Despite the slowdown in the past six months, Yeshaya noted that asset inflows were at the top end of the range the bank had spelled out at the start of 2023.
Morgan Stanley’s fixed-income trading business posted $1.43 billion in revenue, compared with estimates of $1.48 billion. In equities, revenue totaled $2.2 billion, compared with analysts’ $2.26 billion forecast.
Fees from advising on deals totaled $702 million, compared with estimates of $535 million. Equity-underwriting revenue stayed muted at $225 million. Yeshaya pointed to the quarter’s advisory revenue as a sign of improving dealmaking activity that will flow through the rest of the year.
“We’ve been investing on the IBD side,” she said, referring to the dealmaking business and a desire to edge out rivals in the next wave of corporate consolidation.
Also in the results:
- Companywide revenue totaled $12.9 billion, compared with estimates of $12.7 billion.
- The wealth management business reported a pretax margin of 24.9% for the full year.