Morgan Stanley's earnings beat sets it up for a stronger second half
Club holding Morgan Stanley (MS) reported better-than-expected second-quarter results Tuesday, highlighting the bank's solid fundamentals and sending the stock soaring. Revenue for the three months ended June 30 increased 2.5% year-over-year, to $13.46 billion, outpacing analysts' expectations of $13.08 billion, according to estimates compiled by Refinitiv. Earnings-per-share (EPS) fell 11% on an annual basis, to $1.24, but still exceeded the $1.15-per-share estimate forecasted by analysts, Refinitiv data showed. Bottom line It wasn't the strongest quarter the bank has ever reported but it was much stronger than investors were expecting — sending the stock up by over 6% Tuesday. "We started the second quarter with significant headwinds and uncertainties, and it's fair to say that we ended the quarter overall in a better place with a better tone," CEO James Gorman said. "The headwinds reflect the ongoing market transition from a high inflation, low-rate environment to a higher rate, lower inflation environment." Those comments from the bank's post-earnings conference call indicate that its third quarter is likely tracking ahead of the last one. Management also noted that ROTCE — a key metric that impacts the price-to-tangible book valuation investors are willing to pay for a financial institution — was held back by a $300 million severance charge. Excluding this one-time charge, ROTCE would have been 140 basis points higher and earnings would have been 14 cents per share higher. The bank's efficiency ratio would have also been better if not for a severance charge and integration costs relating to the acquisitions of Eaton Vance and E*TRADE. The bank's common equity tier 1 (CET1) capital ratio, which weighs capital versus risk-weighted assets to measure a bank's ability to endure financial stress, came in well ahead of expectations. That Morgan Stanley was able to perform so solidly, despite holding onto so much additional capital — the bank's minimum is about 13% — is a sign that the firm can more than likely continue to put out strong results even if regulators increase capital requirements. Regarding the investment banking unit, which has been under pressure due to a lack of M & A activity and initial public offerings, management noted that "across investment banking, client activity trended positively as the quarter progressed. Between its wealth- and investment management divisions, the bank was able to pull in another $100 billion of net new assets during the quarter, building on top of the $110 billion it accrued during the first quarter. With over $200 billion of net new assets coming into the bank in the first half of the year alone, it's well ahead of the $330 billion per year it needs to realize its medium-term goal of growing net new assets by $1 trillion every three years. That's part of a longer-term objective to amass $10 trillion in client assets. Despite the firm being held back by one-time charges and a prudent decision to maintain higher capital levels against an uncertain (but improving) economic backdrop, the strong results — coupled with commentary that points to further upside ahead — we can confidently reiterate our 1 rating on the stock and a $105-per-share price target. Institutional securities Investment banking revenues were largely in line with last year's results, as increases in equity and fixed income underwriting revenue were almost entirely offset by a decline in advisory revenue, which was negatively impacted by a decline in completed M & A activity. Equity revenues were down on lower client activity and reduced market volatility, which resulted in a decline in cash and derivative products. Fixed income revenue suffered from a decline across most products, due to lower client activity and reduced market volatility. Total expenses were up a little over 2% annually, to $4.58 billion, while provisions for credit losses increased to $97 million, from $82 million a year ago. The increase in provisions reflects continued deterioration in the commercial real estate margin along with slight portfolio growth. Wealth management Asset management revenue was down on lower asset levels, due to market declines. Transactional revenue was up huge on a reported basis, but fell 2% annually when excluding the impact of mark-to-market gains on investments associated with deferred compensation plans. Net interest income benefited from rising interest rates, though this was "partially offset by the impact of lower brokerage sweep deposits as clients continue to redeploy balances," according to the company. A sweep account is set up to move money from one account at the end of each day into another vehicle, typically a money market account. The decline highlights the dynamic of clients seeing better return in areas outside traditional cash accounts. Still, the company said it had "witnessed a moderation of sweep outflows as well as the stabilization of retail investments into cash and cash equivalents." Deposits were up slightly on a sequential basis. Total expenses for the segment increased a bit over 17% annually, to $4.9 billion, while provisions for credit losses increased to $64 million, up from $19 million a year ago, a result of deterioration in the commercial real estate market. Investment management Asset management and related fees fell as a result of lower assets under management, which were hit by lower asset prices and outflows. Performance-based income and other revenues were down as an increase on mark-to-market gains on investments connected with deferred compensation plans, were more than offset by a decline in accrued carried interest across private funds Total expenses for the segment fell by a little over 4% annually, to $1.28 billion, as a slight increase in non-compensation expense was more than offset by a larger decrease in compensation-related expenses. Capital returns Morgan Stanley repurchased 12 million shares in the first quarter, at an average purchase price of $83.86 per share, resulting in a return of capital to shareholders of $1 billion. The firm also renewed it's $20 billion share-repurchase authorization. Given the $1 billion utilized in the second quarter, there is about $13.25 billion remaining under the authorization, as of the start of the third quarter. Looking ahead, the board authorized a quarterly dividend of nearly 85 cents per share, a 7.5 cents-per-share increase. 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The Morgan Stanley headquarters building is seen on January 17, 2023 in New York City. Michael M. Santiago | Getty Images
Source: CNBC
