Morgan Stanley’s Q3 profit decline amid weak investment banking numbers

Morgan Stanley has faced a setback in its third-quarter profits, primarily due to sluggish dealmaking and a discouraging performance in investment banking. The results sent the bank’s shares plummeting by 6.5 per cent, further exacerbated by smaller inflows into the wealth management division and the absence of announcements regarding the CEO succession. 

During the third quarter, Morgan Stanley saw a 27 per cent drop in investment banking revenues compared to the same period last year. Additionally, trading activity faced a downturn as geopolitical risk escalated, and the Federal Reserve implemented aggressive interest rate hikes. The bank underperformed, with global investment banking fees falling by 17 per cent in the quarter, according to Dealogic data. 

The wealth management division also faced challenges, with net new assets shrinking to $35.7 billion, a significant decline from the $64.8 billion reported a year earlier. The wealth management figures and the growth outlook set by CEO James Gorman left investors concerned. 

“The market was disappointed with wealth management and investment banking, divisions that have represented tailwinds to Morgan Stanley,” Reuters quoted Jason Ware, Chief Investment Officer at Albion Financial Group as saying. 

Rising interest rates were identified as one of the key factors affecting the wealth division and trading unit. As interest rates increased, clients chose to invest in money market funds rather than wealth management portfolios. According to Reuters, CEO James Gorman highlighted that clients maintained a cash position of approximately 23 per cent, a trend he anticipates will change as interest rates recede in the coming years. 

Despite the challenges faced, Morgan Stanley reported a profit of $2.4 billion, representing a 9 per cent drop, equating to $1.38 per diluted share. Interestingly, this was a smaller decline than what analysts had predicted, with an expected $1.28 per share, according to LSEG IBES data. 

However, Morgan Stanley’s share performance in 2023 has not been very encouraging, with a 12 per cent decline so far, while the S&P 500 bank index dropped 11 per cent. 

Kenneth Leon, the research director at CFRA Research, adjusted the bank’s 12-month price target to $90 a share, lowering it by $6, though maintaining a ‘buy’ rating. 

Reuters cited analysts at Evercore, who expressed dissatisfaction with the lack of updates regarding the long-anticipated CEO succession at Morgan Stanley. The absence of information was viewed as a mistake by the Board, as it could potentially raise concerns and divisions among stakeholders. 

CEO James Gorman, who has been at the helm of the Wall Street giant since 2010, announced in May his intention to step down within a year. On Wednesday, he noted that the bank was nearing an announcement, providing some reassurance to investors. 

The leading candidates for the CEO position include co-presidents Ted Pick and Andy Saperstein, who head institutional securities and wealth management, respectively. Dan Simkowitz, the head of asset management, is also under consideration, as reported by Reuters. 

Regarding investment banking, Gorman expects most of the activity to materialise next year, despite recent improvements in M&A and capital markets transactions. Notably, the bank’s revenue in fixed income underwriting decreased, contrasting with the performance of some rivals. 

Morgan Stanley also allocated $134 million for provisions for credit losses in the third quarter, a substantial increase from $35 million in the same period the previous year. This surge was primarily driven by deteriorating conditions in commercial real estate (CRE), including provisions to cover losses on undisclosed specific loans. 

(With inputs from Reuters)