Morgan Stanley reported a 55 cents per share profit on $7.8 billion in first quarter revenues, reflecting a 21% year-over-year drop in sales and an over-50% plunge in profits. Those depressed results still surpassed subdued consensus estimates of 46 cents in earnings per share. However, they fell slightly short on the top line.
Sharply declining profits underscore Morgan Stanley's exposure to shifting winds in global financial markets. They also give further merit to CEO James Gorman's decision to push into the wealth management business after the financial crisis and trim the bank's once dominant presence in many fixed income markets such as securitization and interest rate trading.
In a quarter marked by almost across-the-board declines in earnings, Morgan Stanley's wealth management business proved a rare source of strength. The unit generated $786 million in profits on $3.7 billion in sales, reflecting single-digit declines from this time a year ago. The business, which has $2 trillion under management business, posted a 21% pre-tax margin, in line with expectations, as it helps shore up Morgan Stanley's deleveraging balance sheet.
The bank's fully phased-in Common Equity Tier 1 risk-based capital ended the quarter at 14.5%, while its supplementary leverage ratio was 6%. Once one of the weaker firms on Wall Street from a capital standpoint, the growing importance of wealth management operations has transformed Morgan Stanley into a stronger credit.
Wealth management may have stabilized Morgan Stanley's earnings, but it did little to offset sharp declines in investment banking and fixed income trading.
The bank's fixed income and commodity trading division saw revenues plunge 54% to $873 million due to the divestiture of some commodity businesses and lower levels of client trading activity in interest rates, foreign exchange, credit and energy. Equity sales and trading revenues saw less severe declines as total revenues fell 8% to $2.1 billion year-over-year, but rose 13% from the prior quarter.
Morgan Stanley's investment banking operations generated $990 million in revenues, a 15% decline from year ago levels, led by a nearly 50% plunge in equity underwriting activity and a 40% drop in bond underwriting sales. Wall Street was expecting these declines given a dearth of first-quarter initial public offerings and a sharp slowdown in corporate bond issuance, particularly among below-investment grade rated firms and energy-exposed corporations. Morgan Stanley's advisory work on corporate mergers proved a rare bright spot, with revenues rising 25% to $591 million as deals closed in the first quarter.
“The first quarter was characterized by challenging market conditions and muted client activity. Against that backdrop, our businesses delivered stable results," CEO Gorman said in an earnings release, which indicated lackluster activity is carrying over into the second quarter. "While we see some signs of market recovery, global uncertainties continue to weigh on investor activity," he said.
As Morgan Stanley adapts to a less-profitable Wall Street environment, it is working to rein in compensation. The bank's overall employee pay fell 19% to $3.5 billion, but the makeup of that pie is changing. The bulk of Morgan Stanley's compensation now stems from its 15,888 force of wealth management employees, and not its bankers and traders. Wealth management compensation was $2.1 billion, a 4% year-over-year drop, while compensation in the investment bank dropped 30% to $1.4 billion.
Morgan Stanley shares were lower by less than 1% in early trading at $25.70. Shares have fallen 18% year-to-date and 29% over the past 12-months.
Goldman Sachs reports first-quarter earnings Tuesday morning. Results from firms like JPMorgan,
"If indeed the markets remain as is, we will be much more aggressive on the cost front," Gorman said on a call with investors.
