Morgan Stanley profit beats forecasts but shares fall on revenue drop
The bank set aside $234m for bad loans as it braces for a slump in commercial real estate and customers falling behind on payments
Bengaluru/New York — Morgan Stanley’s first-quarter profit beat expectations as rising revenue from its wealth management division offset declines in its investment banking and trading units.
Shares fell more than 3% at $86.81 in premarket trading on Wednesday as investment banking revenue fell 24% to $1.25bn and the bank set aside $234m in the quarter to cover bad loans.
Provisions rose from $57m a year ago as Morgan Stanley braces for a deterioration in commercial real estate and customers potentially falling behind on loan payments amid rising costs of borrowing and recession worries.
Revenue in the wealth management unit jumped 11%, bringing in $110bn in net new assets, of which only about $20bn came 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,” CFO Sharon Yeshaya said.
The downswing in investment banking activity for Morgan Stanley, which forms the core of the bank’s business, dragged total revenue down nearly 2% to $14.5bn in the quarter.
Wall Street’s investment banks have suffered the most from a downturn in M&A as investors shunned risky bets against the backdrop of volatile markets and rapidly rising interest rates.
The turmoil has also brought initial public offerings to a virtual halt as start-ups put off market debuts until investor sentiment improves.
Global M&A activity shrank to its lowest level in more than a decade in the first quarter of 2023, with volumes slumping 48% to $575.1bn by March 30, compared with a year earlier, according to data from Dealogic.
“The investments we have made in our Wealth Management business continue to bear fruit,” CEO James Gorman said.
Revenue from equities trading fell 14%, while fixed income trading dropped 12%.
The bank’s closest rival, Goldman Sachs Group, also reported a slump in its investment banking unit as deal making and bond trading slumped and it lost money on the sale of some assets in its consumer business.
Meanwhile, banking giants JPMorgan Chase & Co, Bank of America Corp and Citigroup reaped windfalls from higher interest payments, while setting aside billions of dollars to prepare for a worsening economy.
Some of the largest US banks also singled out office commercial real estate last week as an area of growing concern, with property values falling and more borrowers defaulting on loans amid rising interest rates and a slowing economy.
Results from Morgan Stanley round out a choppy reporting season for Wall Street’s biggest banks as the collapse of two mid-sized lenders in March sent shock waves across the world and further fuelled recession worries.
While investment banks such as Morgan Stanley and Goldman remain insulated from the broader contagion worries of the crisis, the resultant uncertainty has again hurt the outlook for deal making, dampening hopes of recovery in the near term.
The bank earned $1.70 per share, beating analysts’ average estimate of $1.62 per share, according to Refinitiv data.
Profit applicable to the bank’s common shareholders for the three months to March 31 fell 20% to $2.8bn.
Reuters