Morgan Stanley delivers a rebound quarter, eases concerns about a key overhang
Morgan Stanley delivered mostly better-than-expected first-quarter results Tuesday morning — a much-needed report for the bank, whose stock has lagged industry peers and tested our patience. Revenue for the three months ended March 31 increased 4% year over year to $15.14 billion, outpacing expectations of $14.41 billion, according to estimates compiled by LSEG. Earnings per share (EPS) jumped 19% versus the year-ago period to $2.02, exceeding the $1.66 expected, according to LSEG. Morgan Stanley Why we own it : We own Morgan Stanley for the rebound taking place in IPO and M & A activity along with growth in wealth management, which provides more durable fee-based revenues. We also view the bank’s excess capital as supportive of further shareholder returns via buybacks and dividends while also providing for additional investments in growth. Competitors : Goldman Sachs Weight in Club portfolio : 4.03% Most recent buy : Oct. 18, 2023 Initiated : July 12, 2021 Bottom line The headline numbers were strong, and Morgan Stanley’s miss on net interest income (NII) was notably more than offset by strength in its fee-based revenue streams across the company. In recent years, Morgan Stanley’s management team has aggressively sought to grow those fee-based income streams — particularly in wealth management — in order to be less at the mercy of interest rate fluctuations. We feel good about what we see in the first-quarter results and believe the bank is on track to meet its longer-term financial goals. Morgan Stanley benefited from a combination of “higher asset prices and an improved macroeconomic backdrop,” which led to strength in wealth management, CEO Ted Pick said on the call. Momentum in long-dormant mergers and acquisitions (M & A) activity and initial public offerings drove strong year-over-year growth in investment banking, a key area that we’ve been expecting see a rebound in this year. The bank also saw total client assets swelling to $7 trillion, a notable milestone as management continues its efforts to reach $10 trillion as a long-term target. “We have a clear path to $10 trillion in client assets across Wealth Management and Investment Management. We remain focused on supporting clients on their path to advice, deepening existing client relationships and using our scaled platform to achieve sustainable 30% pretax profits over time,” CFO Sharon Yeshaya said on the post-earnings call. Morgan Stanley’s CET1 (common equity tier 1) ratio supports further shareholder returns without inhibiting the bank’s ability to continue investments in growth; the efficiency ratio came in comfortably below estimates (lower is better); and ROTCE (return on tangible common equity), a key metric when it comes to valuing financial institutions, came in well ahead of expectations. All of these factors more than offset the small miss we got on tangible book value per share. MS YTD mountain Morgan Stanley YTD Shares of Morgan Stanley were up more than 2% after Tuesday’s earnings release and conference call, building on Monday’s modest gains, which broke a three-session losing streak. Last Thursday saw the worst of it, with shares down 5.3% after news that federal regulators were looking into how Morgan Stanley screens clients for its wealth management division. Pick, who took over as CEO at the start of year, said on the call: “This is not a new matter. We’ve been focused on our client onboarding and monitoring processes for a good while. We have ongoing communications with our regulators as all the large banks do.” Pick added, “The costs associated with this are largely in the expense run rate.” There are no intended strategic changes as a result of the probe and management does not see it impacting the bank’s ability to do business. Segment commentary Looking at the Segment Sales part of the earnings table below, Institutional Securities sales easily exceeded estimates thanks to better-than-expected results in all sub-segments. Investment banking revenue advanced 16% from last year, as equity underwriting revenues more than doubled year over year thanks to an increase in IPOs and follow-on offerings. Fixed income revenues also increased thanks to higher bond issuances. Advisory revenues, on the other hand, decreased as the number of complete M & A transactions declined. Equity trading revenue rose 4% from last year thanks to broad based strength in both key business lines and across various geographic regions. The firm also saw “notable strength in derivatives,” which encompasses things like options and futures contracts, according to a release. Fixed-income trading revenue fell 3.5% year over year as client activity in macro and credit declined, though this was partially offset by an increase in commodity-related revenues. Total expenses for the segment (not seen on the table) declined by 1.1% to $4.66 billion, with slight decreases seen in both compensation and non-compensation expenses. The pre-tax margin reported was 34%, up from 28% in the year-ago period. Management sounded upbeat on the path ahead for investment banking. “We expect the steady build of this business to continue,” Yeshaya said. “We are encouraged by the health of the advisory and underwriting pipelines. While the uncertainty of the rate path and geopolitical developments may impact the near-term conversion of pipeline to realize, conditions should improve over time. And the underlying trends suggest that confidence is increasing.” Morgan Stanley’s Wealth Management segment revenue was a new record and came in stronger than expected with strength across the board. Asset management revenue increased 13% from the year-ago period and reached a new record thanks to higher asset levels and the impact of positive fee-based asset flows. The firm gathered $95 billion worth of net new assets in the quarter, much better than the $62 billion that Wall Street analysts anticipated. “Within fee-based flows this quarter, we saw particular strength from the migration of assets from the adviser-led brokerage accounts to fee-based accounts,” Yeshaya said. “This demonstrates that over time, assets migrate through the funnel into recurring revenue-generating accounts. Fee-based assets now stand at over $2 trillion.” Transactional revenue increased 12%, or 9% when excluding the impact of mark-to-market on investments associated with certain employee deferred cash-based compensation programs. The growth was tied to an increase in the volume of structured products in line with the increase we’ve seen in equity markets. Net interest income edged out Wall Street expectations, but still fell 14% year over year as the benefit of higher rates was more than offset by an unfavorable change in the deposit mix. Management said it expects net interest income in the current quarter to be largely in line with what we got this quarter, which suggests it’s likely to be around analysts expectations. Total expenses for the segment increased about 6% annually to $5.08 billion. Pre-tax margin at the segment was 26.3%, better than the 24.6% consensus estimate. Notably, the combination of the deferred cash-based compensation program and another small special assessment from the Federal Deposit Insurance Corp. reduced the segment’s pre-tax margin by roughly 1.15 percentage points. The Investment Management segment came up short versus expectations. Asset management and related fees were up nearly 8% from the year-ago period on higher average assets under management, which benefited from increased asset values. Performance-based income and other revenue was down about 24% from a year ago, though we should note that, at only $31 million in sales, it’s not a very material line item. Total expenses for the segment increased by 1.2% annually to $1.14 billion, as an increase in non-compensation expenses was only partially offset by a slight decrease in compensation expenses. Capital returns Morgan Stanley repurchased 12 million shares in the first quarter, at an average purchase price of $86.79 per share. The result is a return of capital to shareholders of $1 billion. At current share-price levels, Morgan Stanley has an annual dividend yield of 3.75%. Given the firm’s 15.1% CET1 ratio, Morgan Stanley has plenty of excess capital at its disposal to both continue investing in growth and return some to shareholders. (Jim Cramer’s Charitable Trust is long MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Signage is displayed outside Morgan Stanley & Co. headquarters in the Times Square neighborhood of New York.
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Morgan Stanley delivered mostly better-than-expected first-quarter results Tuesday morning — a much-needed report for the bank, whose stock has lagged industry peers and tested our patience.
