Morgan Stanley profit crushes estimates on trading strength

Morgan Stanley eased past Wall Street estimates for profit yesterday, wrapping up mixed third-quarter earnings for big US banks that saw those focused on trading clocking big gains while retail banks took a hit from the pandemic. Like fellow Wall Street trading powerhouse Goldman Sachs, Morgan Stanley capitalised on a flurry of activity in financial markets as clients bought and sold stocks in response to the coronavirus pandemic and many companies went public or raised fresh capital.

While Morgan Stanley’s trading unit did not hit the record highs of the previous quarter, the latest performance was still good enough to help the bank comfortably beat expectations. Striking an upbeat tone about future growth, chief financial officer Jonathan Pruzan said the bank was encouraged by client engagement across all its businesses in the first few weeks of the fourth quarter.

Even as trading returns to the spotlight amid the pandemic, chief executive James Gorman has been taking steps to shore up Morgan Stanley’s asset and wealth management businesses to insulate the bank from weak periods for trading and investment banking. Gorman engineered two large back-toback acquisitions recently – a $7bn deal to buy Eaton Vance Corp to expand its investment-management business immediately after closing its $13bn acquisition of discount brokerage E*Trade Financial Corp.

The bank’s wealth management arm also turned in a solid quarter with a 7% jump in revenue to $4.66bn.

Its return on tangible common equity (ROTCE), a measure of how well a bank uses shareholder money to produce profits, came in at 15%, in line with the target Gorman had set out earlier this year.

“Big investment banks are the easiest financial stocks to own because they have comparatively small loan portfolios (which are the biggest risk) but have upside earnings leverage to the currently active capital markets. Like GS yesterday, today’s MS print proves out that thesis,” said Oppenheimer analyst Chris Kotowski. In contrast to Morgan Stanley and Goldman Sachs, which posted its best results in a decade, Main Street banks like Citigroup and Bank of America struggled due to historically low interest rates, provisions to cover bad loans and lower consumer spending. Even so, most large banks beat profit estimates this quarter, thanks largely due to their trading arms and partly due to muted Street expectations. Revenue from Morgan Stanley’s institutional securities division, which is the bank’s largest breadwinner and houses its investment banking and trading businesses, rose 21% to $6.06bn.

Equities underwriting revenue more than doubled to $874mn due to handsome fees from a number of high-profile initial public offerings such as Snowflake Inc, Royalty Pharma, KE Holdings Inc and Warner Music.

But revenue from underwriting bonds dropped from last year due to declines in loan issuances and muted dealmaking activity.

Net income applicable to common shareholders rose 26% to $2.60bn in the quarter ended September 30. Earnings per share rose to $1.66, compared with the average analyst estimate of $1.28 per share, according to IBES data from Refinitiv. Revenue also comfortably beat estimates, rising 16% to $11.7bn, as all three of its main businesses posted gains.

Morgan Stanley signage is displayed outside of the company’s headquarters in New York. Like fellow Wall Street trading powerhouse Goldman Sachs, Morgan Stanley capitalised on a flurry of activity in financial markets as clients bought and sold stocks in response to the coronavirus pandemic and many companies went public or raised fresh capital.