Morgan Stanley Bucks Banking Sector Trend, Reports Drop In Q1 Profit

Key takeaways

• Investment banking giant Morgan Stanley’s
  MS
  Q1 profit plunged by 19% after M&A activity dried up
• Corporate outfits have struggled with higher interest rates against consumer firms which have seen big profit increases
• Immediate risk of banking crisis has passed, as all eyes turn to the Fed

Another day, another big bank reports its Q1 earnings. This time it’s Morgan Stanley, who rounded off an otherwise upbeat week with a bit of a flat note. Its profits have dipped 19% to $3 billion, beating expectations but sharply down from the highs of 2022 when M&A activity was abundant.

The report comes as no surprise – the M&A market has all but disappeared in light of the ongoing economic downturn – but it’s still a further nudge in the right direction of banks being strong and stable after last month’s crisis. Here’s the lowdown on Morgan Stanley and what comes next for the sector.

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What’s the latest on Morgan Stanley?

Morgan Stanley, a stalwart in the banking sector, reported a 19% drop in quarterly earnings of $3 billion or $1.70 a share. Its revenue hit $14.5 billion. The results beat analyst expectations – they’d predicted a $2.8 billion profit on revenue of $14 billion – but they weren’t as strong as Q1 2022’s results.

As Morgan Stanley is a corporate bank facilitating M&A between companies, its earnings show how the market has dried up over the last year. Morgan Stanley’s investment banking revenue dropped by nearly a quarter (24%).

But it wasn’t all bad news. Its wealth management arm fared better with $110 billion worth of net new assets under management and an 11% revenue increase from the same time last year, while the bank’s ROTCE was at 16.9%.

Chairman and CEO James Gorman said “investment banking activity continued to be constrained” but that the bank remains “well-positioned to provide long-term value to our shareholders”.

What was Wall Street’s reaction?

Morgan Stanley’s share price dropped 3.3% in pre-trading, averaging a 0.7% drop since the opening bell. Other banks have suffered too, despite their wins from last week: JPMorgan is down 0.18% while the Bank of America
BAC
has dropped by 1.88%.

The collateral damage on the other banks’ stock prices shows how jumpy Wall Street is right now. Silicon Valley Bank and Signature Bank collapsed only one short month ago. Even if other banks have stressed their resilience, and Morgan Stanley technically beat analyst forecasts, investor sentiment could come crashing down quickly should the earnings reports tide begin to shift.

How have other banks fared?

As an investment bank, it’s interesting to see how the likes of Morgan Stanley and Goldman Sachs fared compared to other more diversified offerings like JPMorgan and Citigroup
C
. Goldman Sachs posted a similarly mixed picture to Morgan Stanley yesterday, missing its revenue target and reporting a 26% drop in investment banking fees.

This is in stark difference to the consumer-focused banks. JPMorgan posted a 52% earnings increase, while Citigroup made $4.6 billion in profit. Wells Fargo
WFC
saw a 30% increase in net income, and Bank of America reported a 15% profit increase. All four beat investors’ forecasts.

While the latter group has benefited from the eye-watering interest rate climbs, investment banks aren’t so lucky. Higher rates mean borrowing gets more expensive, so more companies make the call to put off big deals until the economic conditions are more favorable.

Is there still a risk of a banking crisis?

While the big banks can absorb bigger hits, the regional banks paint a more telling picture of what the economic landscape looks like at the moment. Thankfully, they’ve bounced back too in light of one of their own going under.

Western Alliance’s shares have soared to nearly 15% today after it reported that deposits have stabilized, growing by $2 billion in the first half of April. The good news was contagious: the beleaguered First Republic Bank
FRC
, which needed a $30 billion cash injection to stay afloat, was up 2% on Wednesday while PacWest Bancorp
PACW
shot up 6.3%. It’s a welcome vote of confidence for the regionals after PNC reported that its net interest income was 1% off analyst forecasts.

Now that all central banks have posted their results and the regionals seem to show signs of stabilizing, investors and experts are satisfied there’s no immediate risk of the sector collapsing into disarray. Attention now turns back to the Fed with its decision on May interest rates looming quickly.

The economic data is still painting a murky picture. Unemployment in the US is rising and new jobs are falling, suggesting the red-hot jobs market is slowly cooling off, but the latest core CPI data accelerated slightly to 5.6%. This was reason enough for Wall Street to start pricing in another quarter-point hike from the Fed next month.

But an increase isn’t set in stone. The latest Fed meeting minutes forecast a mild recession, which may be enough to convince lenders to tighten their belts and pause any need for a quarter-point hike. Consumer prices are down to 5% inflation, down a whole percentage point and far off from the highs of 9.1% seen last summer. It’s a fine line between recession and inflation – and the Fed doesn’t want to unnecessarily deepen households’ financial woes.

The jury’s still out on where the Fed will end up, but hopes that rate cuts might come by the end of the year are slowly disappearing.

The bottom line

There was more interest – and pressure – on these quarterly earnings reports after the second and third-largest bank failures in US history rocked the sector and the nation. Morgan Stanley’s earnings round off a largely successful Q1.

As we watch the regional bank results trickle in and await the Fed’s decision on whether an interest rate hike is happening, Wall Street remains watchful for any signs of something amiss.

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