Strong bond trading helps Morgan Stanley deliver earnings beat

Morgan Stanley brought down the curtain on a generally bright earnings season for the biggest US banks, announcing a 70 per cent rise in net income that handily beat analysts’ expectations.

The bank’s fixed-income and commodities unit delivered net revenues of $1.7bn during the first quarter, almost double the $873m recorded during an unusually tough period a year ago. Investment banking did well too, as fees from underwriting equity and bond issues both more than doubled, to $390m and $531m respectively.

Analysts had expected total net income of $1.65bn, on revenues of $9.29bn. Morgan Stanley delivered $1.93bn of net income, 70 per cent higher than a year ago, on revenues of $9.75bn.

Earnings-per-share came to $1 on a diluted basis, better than forecasts of $0.90.

Shares in Morgan Stanley rose 2.2 per cent in pre-market trading.

“We reported one of our strongest quarters in recent years,” said James Gorman, the bank’s chairman and chief executive, noting solid performances across the board. “We are confident in our business model and the opportunities ahead, while recognising that the environment remains uncertain.”

All the big US banks have enjoyed a boost since the election of Donald Trump in November, partly on a promise of higher growth, lower taxes and lighter regulation towards the financial sector.

Investors have turned more bearish in recent weeks, though, as doubts have emerged over the pace of interest-rate increases, while Mr Trump’s early setback on healthcare has cast doubt over the rest of his reform agenda.

Analysts have responded with downgrades, helping to push the KBW Banks Index into correction territory, off more than 10 per cent from its peak in early March.

“The administration has interesting plans for trying to jump-start growth, but it has not really been able to accomplish anything yet,” said Guy Moszkowski, analyst at Autonomous Research in New York. “So that creates, on the one hand, long-term optimism among corporate leaders but also makes them not actually do anything, until they have more certainty on what the policy direction actually is.”

Results for the first quarter have given some cause for optimism, though. Citigroup, JPMorgan Chase and Bank of America did better in the first quarter almost across the board, showing higher revenue, net income and return on equity. All three beat analysts’ forecasts for earnings-per-share, thanks in large part to still-solid credit quality and higher-than-expected revenues from trading.

There were less positive updates from Goldman Sachs, which stumbled badly in bond trading, and Wells Fargo, which showed some lingering damage from the fake-account scandal last year.

On Morgan Stanley’s earnings call on Wednesday morning, analysts will be keen to hear from Mr Gorman on how he plans to sustain a return on equity in the 9-11 per cent range.

The bank has said it aims to hit that level by the end of this year, after several years of falling short.

Last year the figure was 8 per cent; in the first quarter this year ROE came in at 10.7 per cent on an annualised basis.