Morgan Stanley Shares Plunge After Profit Drops on Slowdown

Morgan Stanley shares plunged the most since June 2020 after the firm’s dealmakers posted the biggest drop in fees on Wall Street and its wealth management unit had the lowest inflows in more than three years.

(Bloomberg) — Morgan Stanley shares plunged the most since June 2020 after the firm’s dealmakers posted the biggest drop in fees on Wall Street and its wealth management unit had the lowest inflows in more than three years. 

Investment banking revenue slid 27% and the fixed-income trading business slumped, leading to a drop in profit. Revenue of $6.4 billion from the firm’s wealth-management business missed analysts’ estimates, and net new assets were $35.7 billion, the least since the depths of the pandemic.

The stock dropped as much as 7.9% in New York trading, putting it on track for the largest post-earnings drop in at least a decade. The move was greater than the 5.5% slide in shares this year through Tuesday. 

The wealth management slowdown came after Morgan Stanley set ambitious targets for a business that has taken off following the acquisition of ETrade. The bank’s net interest income of $2 billion in the quarter was the lowest in over two years as wealthy clients sought out higher yields on their deposits. 

Investors are likely focused on “what drove the weaker net new assets trends in particular, and whether this is the trough in net interest income, as rates appear higher for longer,” Goldman Sachs analysts led by Richard Ramsden wrote in a note before markets opened. “Net new assets were worse than Morgan Stanley’s long-term guidance.”

Even with the declines, Morgan Stanley joined the biggest US banks in surpassing trading expectations. Chief Executive Officer James Gorman has been expressing hope for a rebound in deals and capital raising, saying last quarter that slumping investment-banking fees had bottomed and will rebound in the months ahead, with a return to normalcy likely next year.

“This is solid performance in a mixed environment,” Morgan Stanley Chief Financial Officer Sharon Yeshaya said in an interview. “Our announcements in terms of M&A this quarter were up 50% on a year-over-year basis. We see the backlog continuing to grow,” with everything pointing to a rebound.

Gorman, who has been running the bank since 2010, is nearing the end of his tenure. He has vowed to have a successor named before May, though a decision could come months ahead of that deadline. The three candidates in the running to replace him are Ted Pick and Andy Saperstein, the firm’s co-presidents, and investment-management chief Dan Simkowitz.

Net income for the quarter totaled $2.44 billion, or $1.38 a share. That came in higher than the $1.30 average estimate of analysts in a Bloomberg survey.

Morgan Stanley outlined a plan earlier this year to almost double pretax profit from the firm’s wealth-management business to $12 billion annually. But its asset flows this quarter were significant lower than the pace set in the first half of the year, when it had $200 billion of inflows. That leaves it short of the pace needed to achieve its target of $1 trillion every three years.

“We always did say that this could be lumpy,” Yeshaya said. “That’s why we look at it from a long-term basis.”

Morgan Stanley’s fixed-income trading business posted $1.95 billion in revenue, compared with estimates of $1.83 billion. In equities, it posted $2.51 billion of revenue. That compared with $2.96 billion at Goldman Sachs Group Inc. and $2.07 billion at JPMorgan Chase & Co.

Fees from advising on deals slid by more than a third to $449 million. The bank found a role on Exxon Mobil Corp.’s almost $60 billion acquisition of Pioneer Natural Resources Co. deal, the biggest merger announced so far this year. That work helped push the firm ahead of JPMorgan as the No. 2 M&A adviser globally so far this year, according to data compiled by Bloomberg. At the midyear mark, JPMorgan was ahead of both Morgan Stanley and Goldman Sachs, which now holds the top spot.

Equity-underwriting revenue remained depressed at $237 million. The bank was left out of the high-profile stock listing for chip designer Arm Holdings Plc, one of the largest tech listings ever on a US exchange. It was a glaring omission, as the firm often shows up as a lead adviser on landmark technology IPOs.

Also in Morgan Stanley’s results:

  • Companywide revenue totaled $13.3 billion, slightly ahead of estimates.
  • The wealth-management business reported a pretax margin of 26.7%.
  • The bank also reported $6.8 billion of outflows in its investment-management unit.

(Updates with analyst comment in fifth paragraph.)

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