Morgan Stanley rides wealth management as a third-quarter highlight

The wealth management group attracted $65 billion in net new asset during the quarter, pushing the total this year to $260 billion.

Morgan Stanley brought in $65 billion worth of net new assets to its wealth management business during the third quarter, representing a 22% increase over the prior quarter and pushing total net new assets this year to $260 billion.

During an earnings call Friday morning, Morgan Stanley chairman and chief executive James Gorman said the wealth management business “performed well despite difficult markets.”

He cited the pre-tax margin, excluding integration expenses, of 28.4% during the quarter coupled with the net new assets as evidence of a strong business model.

“Even in a very volatile market environment and with indices down over 20% this year, (wealth management) continues to attract new client assets and remains highly profitable,” he said. “This business’ enormous scale and channel diversification should ensure continued success.”

Other highlights from the quarter ending Sept. 30 include $6.1 billion in net revenues, up 7% from the prior quarter and up 3% from the same quarter a year ago.

Total client assets of $4.1 trillion was down 3% from the prior quarter. Fee-based assets fell by 5% in the quarter to $1.6 trillion.

Morgan Stanley chief financial officer Sharon Yeshaya cited asset consolidation from existing clients, net new clients, workplace relationships and positive net recruiting as “sources of strength.”

“The growth of net new assets highlights the value of trusted advice, especially through periods of market uncertainty,” Yeshaya said. “Our platform continues to attract advisers who recognize the integral role of the wealth management business at the firm, and the value advisers gain by leveraging our technology and products to best serve their clients.”

Like most other businesses in the space, Morgan Stanley was able to leverage the rising interest rate environment for a boost in net interest income, which came in at $2 billion during the quarter, representing a 50% increase from the same period last year.

“In this accelerated rate hike cycle, we have outperformed our modeled beta across our deposit portfolio, which has more than offset the changing mix of our deposit base,” Yeshaya said. “Through the end of the year, we would expect NII to remain broadly in line with the guidance provided last quarter, noting that some of the rate benefit was pulled forward into the third quarter.”

The company’s investment banking group posted $1.28 billion in revenue in the third quarter, down 55% from a year earlier. Revenue from Morgan Stanley’s trading business rose slightly, with fixed income surging 33%.

The Federal Reserve’s resolve to quell inflation along with fears of a looming recession have torpedoed markets. That’s proved particularly painful for investment bankers, with their clients putting off stock and debt sales while waiting for a warmer reception from investors.

Morgan Stanley’s stock price was down 4.4% in mid-day trading Friday, which compares to a 1.6% drop by the S&P 500 Index over the same period. So far this year, Morgan Stanley shares are down 17%, while the S&P is down 22%.

But as Yeshaya explained, the company helped its share price in the third quarter by buying back $2.6 billion worth of its own stock.

CFRA analyst Kenneth Leon acknowledged that Morgan Stanley’s overall $20 billion stock repurchase plan “underscores its leading franchise, with a 4% dividend yield.”

Leon remains bullish on the stock, keeping his price target at $90, which is nearly $15 above where the stock was trading mid-day Friday.

Leon described his outlook as a “hybrid valuation of the premium wealth management unit and the cyclical investment bank.”

“The leading wealth management unit realized plus-3% revenue growth year-over-year, with investment management down 20% and institutional securities down 5%,” he said. “Investment banking realized lower M&A fees, with fixed underwriting down 35% and equity underwriting, including IPOs, down 78%, offset by equity trading down 14%.”

-Bloomberg contributed to this report