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Morgan Stanley Slides After FICC Misses Despite Investment Banking Boom

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by Tyler Durden
Thursday, Jul 15, 2021 - 08:16 AM

Morgan Stanley shares dropped as much as 2% after the bank - which otherwise reported a solid set of numbers beating on the top and bottom line - became the latest to report disappointing second-quarter fixed-income trading revenue of $1.7 billion came in below analyst expectations for $1.9 billion, and tumbled 45% from a year ago even as the bank's dealmakers generated the second-most profitable quarter ever thanks to $2.38 billion in investment banking revenue.

Here are the details from the company's report:

  • Net revenue $14.76 billion, up from $13.66 billion a year ago and beating the estimate $14.03 billion, while also coming above the highest sellside forecast of $14.73 billion. 
  • Adjusted EPS $1.89, estimate $1.64 (range $1.35 to $1.89)
  • EPS $1.85

Broken out by operating segment, virtually everything beat...

  • Equities sales & trading revenue $2.83 billion, above the estimate of $2.50 billion
  • Institutional Investment Banking revenue $2.38 billion, above the estimate of $2.06 billion
  • Wealth management net revenue $6.10 billion, above the estimate of $5.92 billion

Except FICC where sales & trading revenue of $1.68 billion missed the estimate $1.91 billion.

Some other highlights:

  • Wealth management pretax profit $1.6 billion; pretax margin +26.8%
  • Net interest income $1.87 billion, estimate $1.77 billion
  • Assets under management $1.52 trillion, estimate $1.45 trillion
  • Compensation expenses $6.42 billion, estimate $6.22 billion
  • Non-compensation expenses $3.70 billion
  • Expense efficiency ratio was 69% (and that’s down to 68% excluding the impact of those integration-related expenses.)
  • Common equity tier 1 capital standardized ratio hit 16.7%.
  • Quarterly dividend doubled to $0.70 per share, boosting its share repurchase authorization of outstanding stock to $12 billion over the next 12 months.
  • Return on equity +13.8%

Naturally, the bank's modest provision for credit losses decreased 69% from a year ago to $73 million from $239 million, “as a result of an improved macroeconomic environment.” Also notable: $2.4 billion in compensation expenses dropped from almost $3 billion last year, while the non-compensation expenses of a tad more than $2 billion barely budged.

The full financial summary breakdown is below: The results reflected higher asset management fees, growth in bank lending, as well as net new assets and fee-based flows of $71 billion and $34 billion, respectively.

Here is CEO James Gorman with the usual bullish commentary: "The Firm delivered another very strong quarter, with contributions from all of our businesses. Our Wealth and Investment Management businesses attracted $120 billion in flows and Institutional Securities generated over $7 billion in revenues. With our transformed business model providing more stable and durable earnings, we have doubled our dividend and announced a $12 billion buyback as we move to return our excess capital to shareholders. Our global franchise is very well positioned to drive further growth."

Focusing on the all-important Institutional Securities group, the bank reported net revenues for the current quarter of $7.1 billion compared with $8.2 billion a year ago. Why the drop? Fixed income’s $1.7 billion net revenue fell steeply from more than $3 billion a year ago, which was due to “lower bid-offer spreads and volatility as well as tighter credit spreads.” Pre-tax income was $2.5 billion compared with $3.0 billion a year ago

As with other banks, Investment Banking revenues shot up 16% Y/Y to $2.4BN amid a surge in equity underwriting courtesy of the SPAC bubble,

  • Advisory revenues increased from a year ago on higher M&A completed transactions.
  • Equity underwriting increased from a year ago driven by higher volumes in traditional IPOs partially offset by lower revenues from convertible issuance and follow-on offerings.
  • Fixed income underwriting revenues decreased from a year ago primarily due to lower investment grade and non-investment grade bond issuances partially offset by strength in non-investment grade loans.

Of note, equity underwriting posted a solid increase, rising from $882MM to $1.07 billion.

Meanwhile, debt capital markets revenue was down from a year ago, but still did a bit better than analysts expected. Revenue of $640 million was higher than the $571 million forecast by analysts.

Looking at sales and trading, equity net revenues were up 8% from a year ago: according to the statement, "equity net revenues increased from a year ago driven by high levels of client activity with particular strength in Asia. Results reflect higher revenues in prime brokerage partially offset by declines in cash equities and derivatives driven by lower volatility and volumes compared to a year ago.

But it was the company's disappointing fixed Income net revenues which were down 45% from a year ago to $1.68BN, that scared investors: "Fixed Income net revenues declined versus the prior year due to lower bid-offer spreads and volatility as well as tighter credit spreads."

It was also solid quarter for wealth management. Revenues were solidly higher in that business ($6.1 billion v. $4.7 billion a year earlier).

Meanwhile, the bank's recent purchase of E*Trade really helped boost the wealth management business, while Eaton Vance helped boost revenues in the investment management operation, which nearly doubled from last year’s second quarter.

That was largely driven by a gain in asset management because of higher asset levels that were driven by market appreciation and positive fee-based flows. But net interest income in that business also crept higher. And transactional revenues also ticked slightly higher thanks to the E*Trade acquisition and client activity.

Unlike many other banks which are trimming headcount, Morgan Stanley added workers, and worldwide employees ticked up to 71,826 from 70,975 a few months ago, and substantially higher from 61,596 a year ago.

In kneejerk response to the results, some analysts such as Vital Knowledge’s Adam Crisafulli called the equities trading results “underwhelming” compared to the other banks. But, he notes that the wealth management unit is Morgan Stanley’s most important unit and says those numbers were “solid.”

So despite reporting a near-record quarter on the back of a surge in investment banking revenues and solid performance from equity S&T, Morgan Stanley stock is down in premarket as traders are unhappy with the miss in FICC.

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