Morgan Stanley Earnings Top Estimates

Key Takeaways

• Morgan Stanley’s Q3 results came in above expectations
• Even so, profit was down 9% with poor results in the wealth management and investment banking division
• The market reaction was significant, with the stock falling 8% after the announcement

Morgan Stanley have delivered their Q3 results, and while earnings came in above analyst forecasts, the overall picture was enough to send their stock tumbling.

The fallout came mainly as a result of the unimpressive results in the bank’s wealth management and investment banking divisions, but even so the drastic movement of the stock price does appear to be somewhat of an overreaction.

So what were the full numbers for Morgan Stanley, and what’s the outlook for the company in the coming quarters? Let’s go through just that.

Morgan Stanley earnings results

Earnings per share for Morgan Stanley’s Q3 came in at $1.38, ahead of the $1.28 consensus estimates. Revenue also came in ahead, hitting $13.27 billion for the quarter against a forecast figure of $13.23.

While the numbers came in above estimates, that’s against a backdrop of shaly economic conditions. The results are down from this time last year, with profits 9% lower. That’s despite a 2% increase in revenue.

Morgan Stanley has been looking to drive greater profits from their wealth management division, however it suffered from an increase in compensation costs for the quarter. This put a $200 million hole in the revenue numbers, which came in at $6.4 billion against forecast of $6.6 billion.

Due to the continued damper on deal making such as mergers and acquisitions and IPO activity, the investment banking division also struggled to meet estimates. Revenue in that department came in at $938 million, below the $1.1 billion which had been expected.

The bank’s trading desk was the main bright spot, with bond traders bringing in $200 million more in revenue than expected, and equity traders adding an extra $100 million. Combined, trading activities brought in $3.46 billion for the quarter.

CEO James Gorman pointed to a mixed climate impacting the company’s operations, recognizing that the wealth management sector experienced a slower influx of new assets compared to previous periods. The reason, he explained to analysts on Wednesday, is the rise in interest rates, which has heightened the appeal of money market funds and government securities. Despite this, he assured that the wealth management division is on course to achieve his 3-year target of accumulating $1 trillion in fresh assets.

“When people have a choice of making a 4%, 5% return by doing nothing, they’re not going to be trading in the markets,” Gorman said.

How the stock price reacted

The bank’s stock price tanked 8% on release of the results, though it recovered somewhat throughout the session to close down 5.8%. The reaction was surprising given the relatively strong picture presented, especially when considering the slowly improving investment banking sector and rates which may begin to come back down.

The results weren’t materially worse than Bank of America who’s stock bounced on its earnings beat earlier this week.

The slide extends a challenging period for Morgan Stanley, whose stock is now down over 12% year to date. It has been an uncharacteristically difficult period for the banking sector, which is dealing with rising interest rates for the first time in over a decade.

Rapidly rising rates have slammed the brakes on the mortgage sector, as homeowners locked in to low rate deals are unwilling to move or refinance. At the same time, first time buyers have seen their affordability slashed as rates push prospective repayments significantly higher for the same amount of borrowing as just a year or two ago.

With the high level of stock market volatility experienced last year and a challenging funding environment, investment banking activity has also fallen to multi-year lows. These issues, combined with many of the same problems facing every industry such as labor shortages and wage pressure, means that banking has not been the safe haven it has built a reputation on.

The bottom line

Regardless of the short term price action and the challenging year the banking sector has had, it doesn’t make it any worse as an investment for the long term. The finance industry remains one of the cornerstones of the economy, and the biggest names in the sector are still generating high levels of profit.

Despite some wobbles at the beginning of this year, investors who are prepared to stay the course for the long term are likely to continue to be rewarded, as long as they are prepared to ride out any volatility that might happen along the way.