Morgan Stanley tops peers in trading as wealth unit disappoints

Morgan Stanley’s traders joined the party across Wall Street in the second quarter even as the firm’s larger wealth business fell short of expectations.

The bank’s trading business posted the biggest increase among its peers in the second quarter. Morgan Stanley, like its rivals Goldman Sachs Group Inc. and JPMorgan Chase & Co., beat expectations, solidifying the markets business as a hot spot across the industry. Investment-banking fees also increased, soaring 51% from a year earlier. 

Still, Morgan Stanley’s wealth unit, the firm’s biggest growth driver in recent years, fell short of expectations, with $6.79 billion in revenue. Net new assets in that business, a key metric for Morgan Stanley watchers, totaled $36.4 billion, short of the pace needed for the bank to reach its annual target, while net interest income slumped.

Morgan Stanley is trying to rev up enthusiasm for its stock, which has underperformed all its major competitors this year, by persuading investors it can meet ambitious goals for its wealth-management machine. Meanwhile, the bank is fighting for its share of an investment-banking revival that has been a boon to Wall Street businesses.

Shares of Morgan Stanley declined 0.8% to $104.45 at 9:43 a.m. in New York. They’ve climbed 12% this year, well behind the pace set by the biggest US banks.

“The market’s not always right in the short term,” Chief Financial Officer Sharon Yeshaya said in an interview, echoing her longtime former boss James Gorman. “I don’t know how one can apologize for an ROTCE for 17.5%,” she said, referring to the firm’s return on tangible common equity.

Yeshaya touted returns that were stronger than those of most competitors, and said that over time the stock will catch up with the earnings growth.

‘Balanced Business’

“We have both sides working,” she said, pointing to improvements in the firm’s money-management business as well as its Wall Street operations. “It’s really about the balanced business model.”

Overall, Morgan Stanley posted $3.08 billion in net income for the quarter on $15 billion in revenue.

“Seasonally softer net new asset growth and 3% quarter-over-quarter lower NII in wealth were the only real issues we saw,” Evercore ISI analyst Glenn Schorr wrote in a note to clients. “Our gut is tax season is mostly to blame and the rest of results were pretty darn good amidst this improving capital markets backdrop.”

In May, the bank said Gorman will cede his role as Morgan Stanley chairman at the end of the year. He had handed over the chief executive officer role to Ted Pick at the start of 2024.

Fixed-income trading was up 16% to $2 billion and the equity business climbed 18% to $3.02 billion. The combined gain outstripped the pace set at the other big US banks. 

The firm earned $592 million in fees from advising on deals, while analysts had expected $523 million. Equity-underwriting fees came in at $352 million as a return of public listings and secondary offerings has raised banker hopes for a fuller reopening of those markets. Debt underwriting totaled $675 million.

“Backlog continues to improve,” Yeshaya said. She also batted down the idea of the looming US election cutting into the revival in the dealmaking business. “There isn’t evidence that it stops deals from happening or changes the calendar all that much.”

Pretax margin in the wealth-management business, another closely watched metric, came in at 26.8% that was just behind estimates. The bank has said it’s goal is to lift that to 30%, and Yeshaya said that “we have steadily increased margin over the course of the quarter.”

Across its wealth- and investment-management units, the banks oversees about $7.2 trillion in assets and has said it’s working toward growing that to $10 trillion, a move that it has said will yield durable fee growth.