Morgan Stanley rose the most in six months after company executives said the worst may be over for the firm’s trading and investment-banking slump.
“The more promising tone and activity seen later in the quarter across many parts of our businesses is promising,” Chief Executive Officer James Gorman said on a call with analysts to review second-quarter results. After noting that the firm started the quarter with “significant headwinds,” the CEO said it ended June “overall in a better place, with a better tone.”
Shares of the company jumped 5.5%, the biggest increase since Jan. 17, extending this year’s gain to 7.2%.
The more optimistic remarks came on the heels of a disappointing earnings report for the second quarter. Morgan Stanley’s Wall Street operations sputtered amid a slowdown in trading and investment banking.
Revenue from the trading unit slid 22% from a year earlier and that, combined with a dealmaking slump, led to results that were weaker than analysts predicted. Record net revenue from wealth management helped cushion the blow.
The New York-based firm also racked up $308 million in severance costs tied to the more than 3,000 jobs it eliminated earlier this year to cope with the industry’s dealmaking drought. Profit fell 13% to $2.18 billion.
Chief Financial Officer Sharon Yeshaya was reluctant to call a bottom for investment banking, but also pointed to an improving tone during the second quarter in sounding an optimistic note for the rest of the year.
“It feels as though things are getting better and the signs are encouraging,” Yeshaya said in an interview. The backlog is building and “it sets us up for a better 2024.”
While some of the biggest US banks reported earnings that beat expectations last week on the strength of their consumer-focused businesses, firms more reliant on trading and dealmaking — like Morgan Stanley — were expected to take a profit and revenue hit. Analysts predict Goldman Sachs Group Inc., which reports results Wednesday, may post one of its worst quarters in almost half a decade under Chief Executive Officer David Solomon.
Morgan Stanley outlined a plan earlier this year to almost double profit from its wealth-management juggernaut in coming years. The bank’s new long-term goal of more than $12 billion in pretax earnings will come from a mix of asset growth, more lending and expanding markets. The unit, which has benefited from higher net interest income this year as a result of rising rates, reported revenue of $6.66 billion, up 16% from a year earlier.
The bank reported about $100 billion in inflows, with roughly $90 billion in its wealth unit that kept it on track for its ambitious target of sopping up $1 trillion in new assets every three years.
“What’s most encouraging to me is the evidence of growth against all different forms of environment,” Yeshaya said. “That sets us up well as the environment and market turns.”
Gorman said in April that underwriting and mergers activity had been subdued and that he didn’t expect a rebound before the second half of this year or in 2024.
The stock had been outperforming the firm’s rivals in recent years as the bank repositioned itself under Gorman, who put a bigger focus on expanding the wealth-management business. Gorman, 65, said in May that he planned to hand the reins to a successor within 12 months. The race to replace him has come down to three top candidates: Ted Pick and Andy Saperstein, the New York-based firm’s co-presidents, as well as investment-management chief Dan Simkowitz.
There’s still some unfinished business for Gorman. The company has said it’s in talks with US prosecutors and regulators to resolve a probe into its block-trading practices. Gorman has identified the matter as one of the items he would like to handle before he steps down.
Other key results:
- Fixed-income trading revenue of $1.72 billion fell short of analysts’ estimates of $2 billion.
- Equities-trading revenue fell 14% to $2.55 billion, “primarily driven by declines in cash and derivative products on lower client activity and lower volatility in the markets,” the company said.
- Fees from advising on deals were $455 million, down 24% from a year earlier on fewer completed M&A transactions.
- Equity-underwriting revenue was $225 million and fixed-income underwriting was $395 million. Bankers are expecting capital markets to be more robust in the months ahead.
--With assistance from Keith Gerstein.
