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Profit Tumbles in Morgan Stanley’s Quarterly Earnings Report

Key insights

  1. Morgan Stanley’s Q2 earnings exceeded expectations, with its profit decline being less severe than anticipated.
  2. The wealth management division of the bank posted record quarterly revenue.
  3. At Tuesday’s market close, Morgan Stanley shares surged 6.45%, the largest increase since 2020.

Morgan Stanley’s second-quarter earnings are characterized by a decline in investing and a significant increase in wealth management. As the major bank considers a new chief executive officer and focuses on driving even more wealth management business to the firm, Wall Street can’t get enough of the news, which propelled Morgan Stanley’s stock to its largest increase in years.

The generally favorable news rounds out banks’ inconsistent earnings results to date. The sector has maintained its position since the March craziness, but with inflation falling, the end of the tunnel is in sight. Continue reading to learn where Morgan Stanley excelled in the second quarter.

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What was the nature of Morgan Stanley’s earnings beat?

While some of Morgan Stanley’s main revenue streams decreased, the bank still exceeded analyst expectations. Profit decreased 13% year-over-year to $2.18 billion, or $1.24 per share, on $13.46 billion in revenue. This exceeded expectations, which had predicted earnings per share of $1.20 on revenue of $13 billion.

Revenue from trading fixed income decreased by 31%, while revenue from trading equities decreased by 14%. Investment bank advisory revenue decreased 24% to $455 million, as anticipated. JPMorgan, Citigroup, and Wells Fargo also reported similar declines in deal-making activity in their quarterly earnings reports.

Morgan Stanley also reported $308 million in severance payments as the bank carried out mass reductions earlier this year, eliminating more than 3,000 positions across its global operations in response to the deal-making drought.

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The saving grace, however, was the wealth management division of Morgan Stanley, which posted a record revenue increase of 16% year-over-year to $6.7 billion. Last year, it was at $5.7 billion, which is an impressive increase. At $1.3 billion, the division’s net income increased by 10%.

The CEO of Morgan Stanley, James Gorman, stated in a written statement that the bank “delivered solid results in a challenging market environment.” Beginning with macroeconomic uncertainty and subdued client activity, the quarter concluded on a more optimistic note.

How did it perform relative to other banks?

On Tuesday, another prominent bank reported earnings. The bank’s earnings increased by 19% to $7.41 billion, or 88 cents per share, compared to analysts’ expectations of 84 cents per share.

Bank of America’s second-quarter revenue increased 11% to $25.33 billion, aided in part by a 14% increase in net interest income, which rose to $14.2 billion. While equities revenue declined 2%, it was offset by a 9% increase in global markets revenue, and the bank reported “zero trading loss” days for the first six months of 2023.

JPMorgan, Citigroup, and Wells Fargo kicked off the banking earnings season late last week. JPMorgan reported a 44% increase in net income and a 67% increase in profit, while Citigroup’s revenue just exceeded expectations at $19.44 billion.

For the second quarter, Wells Fargo’s net interest income increased by $13.2 billion, with earnings per share reaching $1.25 on $20.5 billion in revenue.

Today, the investment-heavy bank Goldman Sachs will report its earnings, but investors are not holding out much hope for a gain as M&A activity has plummeted.

The market response

Despite the investment division’s losses, Wall Street was pleased with Morgan Stanley’s earnings beat. At Tuesday’s close, the share price of Morgan Stanley increased by 6.45%, which is the closest to the stock’s largest increase since November 2020. The share price of Morgan Stanley has increased by 7.1% since the beginning of the year.

Bank of America’s stock rose by 4% as a result of its overall earnings beat. The KBW Nasdaq Bank Index has declined by 15% since the beginning of the year, but it has gained nearly 3% in the last five days due to better-than-anticipated earnings from the main banks.

Can Morgan Stanley’s upward trend continue?

After passing the Federal Reserve’s annual stress test last month, the bank increased its quarterly dividend by 9.7 percent to 85 cents per share, and Morgan Stanley reauthorized its $20 billion share repurchase program. This is beneficial news for income investors.

After the 2008 banking crisis shook the foundations of the banking industry, CEO James Gorman’s long-term transition toward wealth management paid off handsomely. Morgan Stanley has amassed $200 billion in net new assets so far this year as a result of significant acquisitions such as Smith Barney and, more recently, E-Trade.

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Morgan Stanley reported Q2 client assets of $4.9 trillion, a 15% year-over-year increase, with $3.7 trillion of those assets originating from the advisor channel.

This focus on expanding the wealth management business enables Morgan Stanley to weather the current storms, and traders are eager to recompense the bank for its efforts.

Morgan Stanley seems unstoppable, doesn’t it? The only snag is determining who will succeed Gorman as the company’s CEO. There are currently three prominent figures in contention for the top position, but investors will want to know the frontrunner as soon as possible to avoid unpleasant surprises.

The conclusion

Morgan Stanley has exerted significant effort to transform its organization into a multidisciplinary investing and wealth management juggernaut. Wall Street is ecstatic about the wealth management division’s record revenue in the second quarter, even though the bank has experienced a decline in deal-making activity similar to that of many other financial institutions.

With the broader U.S. economy appearing to be on firmer footing, the banking sector could swiftly recover, and the March banking crisis will be a distant, if painful, memory.

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