Morgan Stanley outshines investment banking rivals

Division’s revenues rise 14% well ahead of expectations thanks to equity underwriting

Robert Armstrong in New York OCTOBER 16, 2018

The Financial Times — Morgan Stanley’s growth in investment banking outshone Wall Street rivals in the third quarter, pushing revenues and profits past analysts’ expectations.

Investment banking revenues rose 14 per cent to $1.5bn, well ahead of Wall Street forecasts. Equity underwriting was particularly strong at $441m, 60 per cent higher than the year earlier. Fixed income underwriting grew 15 per cent.

The results compared favourably with those of Goldman Sachs, which also reported on Tuesday, and where investment banking revenue grew 10 per cent. Across the rest of Wall Street’s big banks — JPMorgan, Bank of America and Citigroup — investment banking revenue fell in the third quarter.

Shares in Morgan Stanley rose about 3 per cent to $44.67 in early trading. But recent declines in stock markets worldwide led some analysts to question whether the strong results would be enough to change the longer-term negative trajectory of Morgan Stanley’s shares, which were down 17 per cent year to date before the third quarter report.

“The results were good across the board, particularly in investment banking and sales and trading, but it feels like ancient history,” said Jim Shanahan, analyst at Edward Jones. “Given the decline in markets since the end of the quarter, the stock is likely to trade along with market sentiment” in the weeks to come.

James Gorman, chief executive of Morgan Stanley, expressed consternation at the share declines this year given the bank’s operational performance. “Return on equity is up 40 per cent year to date, revenue is up 12 per cent . . . [the stock’s performance] is a little bewildering against the backdrop of a strong US economy, when we are overweight the US,” he said.

Mr Gorman pointed to the $2.5tn in client assets in Morgan Stanley’s wealth management business, and its market share gains in equity trading, as evidence of the sustainability of its revenues.

He committed to continuing to return capital to shareholders in the form of dividends and buybacks, barring a dramatic change in market conditions. “Our capital distribution should go up,” he said. “Frankly, we are making too much money to leave it [inside the bank].”

Total revenues at Morgan Stanley were $9.6bn, compared with the $9.1bn recorded in the same period a year ago and analysts’ estimates of $9.6bn. Net earnings of $2bn compared to $1.7bn a year ago and expectations of $1.7bn.

The bank’s tax rate in the quarter, at 24 per cent, compared to 28 per cent a year ago.

The company’s compensation and total expense ratios, at 44 per cent and 71 per cent, respectively, were both slightly improved from 2017 levels, sustaining a trend of increased efficiency across Wall Street’s big banks.