Morgan Stanley Beats Despite 9% Drop In Revenue, Helped By Cost-Cutting, Strong FICC; Shares Jump

Following the example set by the other banks, earlier today Morgan Stanley, the last big bank to report earnings,  said its profit fell 12% in Q2 on a 9% drop in revenue even as the company weathered volatile markets that affected its investing and corporate clients. The EPS of $0.75, however, beat sharply lowered expectations of $0.60 on the back of sharp cost-cutting measures, pushing its shares up 3% in the premarket.

Net income declined to $1.58 billion, or 75 cents a share, from $1.81 billion, or 85 cents a share, a year ago. Revenue tumbled 8.6% to $8.91 billion. The results come a day after Goldman Sachs, Morgan Stanley’s great Wall Street rival, also disclosed a worse-than-expected performance from its equities unit.

Morgan Stanley's own trading revenue down 7.1% to $3.26 billion from $3.5 billion a year ago, but when excluding an accounting adjustment, trading revenue fell 2%.  Investment-banking revenue fell 23% to $1.11 billion from $1.44 billion in the second quarter of 2015. Fees from advising on mergers and other deals rose 17% to $497 million from $423 million a year ago. Revenue on stock and bond underwriting slipped 40% to $611 million from $1.02 billion in the same period a year prior. This, however, was a solid beat to expectations with MS outperforming consensus in virtually every category, with particular strenght in FICC. 

  • Trading revenue  $3.45BN vs est. $3.12BN
  • FICC $1.30BN vs est. $1.01BN
  • Equities $2.15BN vs est. $2.11BN
  • I-banking $1.22BN vs est. $1.10BN

CEO James Gorman said that the bank’s results were a reflection of “solid performance in an improved but still fragile environment. In the midst of market uncertainty, we maintained our leadership positions across our core franchises and continued our focus on prudent risk management and judicious expense control.”

According to the FT, the drop in equities is likely to worry Mr Gorman, who last year reshuffled the bank’s trading businesses to promote equities veterans – including Ted Pick, head of global equities since 2011, who now runs global sales and trading for both equities and bonds. Six years ago Mr Gorman set out to cut the FIC unit down to size, in order to achieve a better balance between volatile income streams from trading and stickier, annuity-like revenues from wealth and asset management. That effort was a failure, he conceded in January, as he detailed more cuts to FIC and pushed back the bank’s main profitability target — a 9-11 per cent return on equity — to the end of 2017.

Over the past year the bank has cut about a quarter of the people dedicated to the bond-trading business around the world. It says it plans to reduce assets in its fixed-income and commodities business to $120bn or below by the end of next year, from $136bn at the end of last year.

As WSJ adds, Gorman has been working to boost profitability by trimming the capital committed to bond trading desks and boosting loans to investing clients of the firm’s large wealth management division. Earlier this year, the firm also disclosed its aim to cut $1 billion in expenses, a theme that has gained momentum at banks from Goldman Sachs Group Inc. to Bank of America Corp. this quarter.

Just like in the case of Goldman, Morgan Stanley slashed overhead and firmwide expenses fell 8.4% to $6.43 billion from $7.02 billion in the second quarter last year. Cost from employee pay and benefits fell 8.9% to $4.02 billion from $4.41 billion. Return on equity declined to 8.3% from 9.1% in the second quarter of 2015. Morgan Stanley executives have pledged to lift returns to 9%-11%.

Morgan Stanley shares have tumbled 11% this year as investors fretted over the firm’s ability to weather the slowdown. Other banks reported better-than-expected trading results in the second quarter, driven in part by a burst of client activity around the U.K. vote to leave the European Union in June.

It appears that Brexit was actually a boon to banks, not the bust it was widely predicted to be.