Morgan Stanley’s Quarterly Earnings Sees Profit Tumble

Key takeaways

• Morgan Stanley’s Q2 earnings surpassed expectations, with its profit fall not as bad as predicted
• The bank’s wealth management division posted record revenue for the quarter
• Morgan Stanley shares soared 6.45% higher by Tuesday’s close – the biggest increase since 2020

Investing down, wealth management way up – that’s the flavor of Morgan Stanley’s second quarter earnings. As the big bank weighs up a new CEO and focuses on driving even more wealth management business to the firm, Wall Street can’t get enough of the beat and pushed Morgan Stanley shares to the biggest jump in years.

The largely positive news rounds out mixed earnings beats from the banks thus far. The sector has stayed the course after the March madness, but with inflation down, the light at the end of the tunnel is in sight. Read on to find out where Morgan Stanley was triumphant this Q2.

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What was Morgan Stanley’s earnings beat like?

While some key revenue areas for Morgan Stanley decreased, the bank still beat analyst expectations. Morgan Stanley’s profit fell 13% year-on-year to $2.18 billion, with $1.24 a share on $13.46 billion in revenue. This surpassed forecasts, which had predicted $1.20 earnings per share on $13 billion in revenue.

Fixed income trading revenue fell by 31%, while equity trading revenue was down 14%. As expected, the bank’s investment bank advisory revenue fell 24% to $455 million. It’s not the only one to have seen significantly lower deal-making activity: JPMorgan, Citigroupand Wells Fargo reported similar losses in their earnings reports.

Morgan Stanley also reported $308 million in severance payments as the bank undertook mass layoffs earlier this year, culling over 3,000 positions across its global operations to cope with the deal-making desert.

But the saving grace was Morgan Stanley’s wealth management arm, which posted a record revenue jump of 16% year-on-year to $6.7 billion. It was at $5.7 billion last year, which is an impressive jump. The division’s net income increased by 10% to $1.3 billion.

In a written statement, Morgan Stanley CEO James Gorman said the bank “delivered solid results in a challenging market environment. The quarter started with macroeconomic uncertainties and subdued client activity, but ended with a more constructive tone”.

How did it fare compared to other banks?

Bank of AmericaBAC
was the other major bank to report earnings on Tuesday. The bank reported a 19% earnings increase to hit $7.41 billion, totaling 88 cents a share versus analysts’ expected 84 cents a share.

Bank of America’s revenue was up 11% in the second quarter, reaching $25.33 billion, partly helped by a 14% jump in net interest income which climbed to $14.2 billion. The bank even saw a win for its investment banking; while equities revenue fell 2%, this was counteracted with the global markets revenue gaining 9% and the bank claiming to have “zero trading loss” days for the first half of 2023.

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The end of last week saw JPMorgan, Citigroup and Wells Fargo kick off the banking earnings season. JPMorgan reported a 44% net income increase and a 67% climb in profit; Citigroup was more of a mixed bag, with revenue just surpassing expectations at $19.44 billion. Wells Fargo’s net interest income was up $13.2 billion for the second quarter, with earnings per share arriving at $1.25 based on $20.5 billion revenue.

The investment-heavy bank Goldman Sachs is set to release its earnings today, with investors not holding out much hope for the beat’s prospects as M&A activity has plunged.

The market reaction

Despite the losses made in the investment arm, Wall Street liked what Morgan Stanley had to show in its earnings beat. Morgan Stanley’s share price soared by 6.45% higher at Tuesday’s close, which is the closest to the biggest jump the stock has seen since November 2020. Morgan Stanley’s share price is up 7.1% since the beginning of the year.

Bank of America’s shares were up 4% off the back of its overall positive earnings beat. The KBW Nasdaq Bank Index has seen a 15% loss since the start of the year, but it’s climbed nearly 3% in the last five days off the back of better-than-expected earnings from the major banks.

Can Morgan Stanley continue its upwards momentum?

Last month, after the bank passed its Federal Reserve annual stress test, it raised its quarterly dividend by 9.7% to hit 85 cents a share – and Morgan Stanley announced it was reauthorizing its $20 billion share repurchase program. That’s good news for income investors.

After the 2008 banking crisis rocked the banking industry to its core, CEO James Gorman’s long-term pivot towards wealth management has paid off in spades. Having made serious acquisitions like Smith Barney and, more recently, E-Trade in 2020, Morgan Stanley has gained $200 billion in net new assets so far this year.

The division demonstrates strength in depth: Morgan Stanley reported Q2 client assets at $4.9 trillion, which is a 15% increase year-on-year, with $3.7 trillion of those assets coming from the advisor channel. This focus on growing the wealth management business means Morgan Stanley can weather the storms we’re seeing now – and traders are all too happy to reward the bank for its hard work.

Morgan Stanley seems unstoppable – doesn’t it? The only fly in the ointment is the matter of who succeeds the outgoing Gorman as CEO of the company. So far, there are three senior figures in line for the top job, but investors will want to hear who’s leading the charge sooner rather than later to avoid any surprises.

The bottom line

Morgan Stanley has worked hard to transform its business into a multi-disciplinary investing and wealth management powerhouse. The second quarter earnings reflect just that: while the bank has suffered a dip in deal-making activity like many others, the record revenue for the wealth management division is something for Wall Street to get excited about.

With the wider U.S. economy looking like it’s on firmer footing, we could see the banking sector quickly bounce back – and the woes of the March banking crisis will be a distant, if painful, memory.

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