30th May 2024

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Business Industry and Financial

Morgan Stanley chief warns investment banking may not recover until next year

Morgan Stanley chief executive James Gorman has warned investment banking revenues may not recover until next year after the Wall Street group’s net profits fell almost a fifth in the first quarter.

A prolonged slowdown in investment banking activity has hit Morgan Stanley and its rivals as financial turmoil following the collapse of US regional lenders and Credit Suisse in Europe kept dealmakers on the sidelines.

Gorman told analysts on Wednesday that mergers and acquisitions as well as debt and equity underwriting activity “remain very subdued” but argued these revenues would return eventually.

“Already, we’re seeing a growing M&A pipeline and some spring-like signs of new issuance emerging. That said, it largely remains a back half 2023 and full year 2024 story,” Gorman said during the bank’s first-quarter earnings call.

Growth in its wealth management division, which had been central to Gorman’s success in boosting the stock price, failed at the start of 2023 to pick up the slack from the investment banking slowdown.

Morgan Stanley shares closed up about 0.7 per cent in New York.

Line chart of $bn showing Investment banking revenues fall from a year ago

Net income applicable to shareholders totalled $2.98bn in the first quarter, down 19 per cent from the same period last year. Analysts had forecast quarterly net income of $2.92bn, according to data compiled by Bloomberg.

Morgan Stanley’s investment banking revenues fell 24 per cent to $1.2bn, slightly ahead of analysts’ estimates of $1.1bn and in line with similar drops at the other large Wall Street banks.

Revenue from fixed income trading, which in the past 12 months has benefited from central banks’ aggressive interest rate rises and market volatility around the war in Ukraine, was down 12 per cent at $2.6bn.

This beat analysts’ estimates for $2.4bn but still lagged behind rivals JPMorgan, Citigroup and Bank of America where revenues were either flat or up. Goldman Sachs on Tuesday reported fixed income trading revenues were down about 17 per cent.

Line chart of Fixed income trading revenues in $bn showing Some Wall Street banks benefit from fixed income trading boom more than others

The bank’s wealth management division made $6.6bn in revenue in the first quarter, a gain of 11 per cent from the same period last year and ahead of analysts’ expectations. The division also pulled in $110bn in net new assets during the quarter.

In recent years, Gorman has grown Morgan Stanley’s money management operations with deals for ETrade and Eaton Vance, and he told analysts on Wednesday that “we’ll do more acquisitions”.

“There is no doubt about that whatsoever. And it will be in the wealth and asset management space and we constantly keep a list of who’s attractive and who would be a good fit,” he said, before adding that there was “nothing imminent”.

Morgan Stanley said deposits, which had been a major focus for investors following the collapse of Silicon Valley Bank in March, fell 3 per cent to $340.9bn, from $350.6bn last quarter. Many of Morgan Stanley’s deposits are from wealthier clients who tend to be less sticky and more likely to pull their funds in search of a better rate.

Morgan Stanley chief financial officer Sharon Yeshaya told the Financial Times that the collapse of SVB triggered a movement out of deposits and into products such as money market funds and US Treasuries but that many of these assets still remained with the bank.

Profits were hit by the bank quadrupling its provisions for potential credit losses to $234mn, up from $57mn a year ago, which it said was primarily related to commercial real estate and deterioration in the macroeconomic outlook.