Record asset management revenues helped Morgan Stanley partially offset a sharp decline at its investment bank, allowing it to beat earnings expectations for the fourth quarter.
Overall, Morgan Stanley reported a 40 percent year-over-year decline in net profit to $2.2 billion, but Tuesday’s results for earnings of $1.26 per share beat analyst estimates of $1.19.
The numbers also highlighted the impact of CEO James Gorman’s efforts to diversify into wealth and asset management. So far, it has been only partially successful in counterbalancing highly cyclical investment banking revenues in difficult markets.
But investors have applauded the approach, creating a gap in the stock market’s valuation with longtime rival Goldman Sachs, which also reported earnings on Tuesday.
Morgan Stanley shares rose more than 7 percent in morning trading.
The company’s results include $133 million to fund about 1,800 job cuts, about 2 to 3 percent of the company’s workforce, which the bank implemented late last year. Chief Financial Officer Sharon Yeshaya said no further layoffs are expected unless the economy deteriorates. “We are comfortable with our position,” she added.
Investment banking had another challenging quarter, with Morgan Stanley’s revenues down 49 percent year-over-year to $1.25 billion, in line with analyst estimates of $1.2 billion. Rivals JPMorgan Chase, Bank of America and Citigroup reported Friday that investment banking revenues more than halved in the last quarter from a year ago.
The drop underlined the difference from 2021, when Morgan Stanley and rivals brought in revenue from M&A advisory and new IPOs. Such activity slowed dramatically in 2022.
Asset management revenues, including online trading platform ETrade, rose 6 percent to more than $6.6 billion. But investment management, including Eaton Vance after Morgan Stanley’s acquisition of the money manager in 2021, was hit by bearish markets that reduced assets under management. Revenue fell 17 percent to $1.5 billion, but beat analyst estimates of $1.3 billion.
“As we approach 2023, we do so with calm confidence, recognizing that we have visibility into the sustainability of our wealth and wealth management business,” Gorman said during a call with analysts. “I feel good about where the whole package is.”
Analysts at UBS called the “core trends encouraging” and believed that “resilient asset management” meant Morgan Stanley was “clearing the low bar”.
Trading results were significantly weaker than analysts had expected, with net sales of $3.6 billion. Fixed income trading had its best year in a decade, but stock prices were dragged down by an unflattering comparison to 2021, when the bank posted mark-to-market gains. By comparison, JPMorgan’s trading income was up 7 percent and Citi’s was also up 18 percent.
Gorman and Yeshaya highlighted the bank’s 15.3 percent common equity tier 1 capital ratio, which they say gave the bank the flexibility to continue buying back shares, increasing dividends and seizing opportunities once the economy attracts. “If the markets recover, we will benefit from the growth,” Gorman said during a call with analysts. “It’s a great position to be in.”
The chief executive also said improving margins in asset management, which were 29.2 percent in the fourth quarter excluding integration costs, were approaching the company’s target of 30 percent. That helped the unit generate $6.6 billion in pre-tax profits by 2022. In the longer term, Gorman said the company aimed to increase client assets, which currently amount to $5.5 trillion, by $1 trillion every three years.
Gorman said he was “quite confident” about the economic outlook and expected the US Federal Reserve to stop raising rates later this year. “If the Fed pauses, underwriting activity will increase.”