Morgan Stanley sees Q3 profit slide on investment bank slowdown

Revenue from the fixed-income trading business slumped 11% and, along with muted fees from dealmaking, caused a drop in net income.

Morgan Stanley’s third-quarter earnings slid amid sluggish results from the firm’s investment bank and a miss in wealth management.

Revenue from the fixed-income trading business slumped 11% and, along with muted fees from dealmaking, caused a drop in net income. Revenue of $6.4 billion from the firm’s wealth management business missed analysts’ estimates, and net new assets slumped to $35.7 billion from $89.5 billion the prior quarter.

“This is solid performance in a mixed environment,” Morgan Stanley chief financial officer Sharon Yeshaya said in an interview. “Our announcements in terms of M&A this quarter were up 50% on a year-over-year basis. We see the backlog continuing to grow,” with everything pointing to a rebound.

Even with the declines, Morgan Stanley joined the biggest U.S. banks in surpassing trading expectations. Chief Executive James Gorman has been expressing hope for a rebound in deals and capital raising, saying last quarter that slumping investment-banking fees had bottomed and will rebound in the months ahead, with a return to normalcy likely next year.

Gorman, who has been running the bank since 2010, is nearing the end of his tenure. He has vowed to have a successor named before May, though a decision could come months ahead of that deadline. The three candidates in the running to replace him are Ted Pick and Andy Saperstein, the firm’s co-presidents, and investment management chief Dan Simkowitz.

Morgan Stanley shares dropped 3% to $77.95 at 8:01 a.m. in early New York trading. The stock was already down 5.5% this year through Tuesday.

Net income for the quarter totaled $2.44 billion, or $1.38 a share. That came in higher than the $1.30 average estimate of analysts in a Bloomberg survey.

Morgan Stanley outlined a plan earlier this year to almost double pretax profit from the firm’s wealth-management business to $12 billion annually. But its asset flows this quarter were significant lower than the pace set in the first half of the year.

“We always did say that this could be lumpy,” Yeshaya said. “That’s why we look at it from a long-term basis.”

Morgan Stanley’s fixed-income trading business posted $1.95 billion in revenue, compared with estimates of $1.83 billion. In equities, it posted $2.51 billion of revenue. That compared with $2.96 billion at Goldman Sachs Group Inc. and $2.07 billion at JPMorgan Chase & Co.

Fees from advising on deals slid by more than a third to $449 million. The bank found a role on Exxon Mobil Corp.’s almost $60 billion acquisition of Pioneer Natural Resources Co. deal, the biggest merger announced so far this year. That work helped push the firm ahead of JPMorgan as the No. 2 M&A adviser globally so far this year, according to data compiled by Bloomberg. At the midyear mark, JPMorgan was ahead of both Morgan Stanley and Goldman Sachs, which now holds the top spot.

Equity underwriting revenue remained depressed at $237 million. The bank was left out of the high-profile stock listing for chip designer Arm Holdings, one of the largest tech listings ever on a U.S. exchange. It was a glaring omission, as the firm often shows up as a lead adviser on landmark technology IPOs.

Also in Morgan Stanley’s results:
• Companywide revenue totaled $13.3 billion, slightly ahead of estimates.
• The wealth management business reported a pretax margin of 26.7%.
• The bank also reported $6.8 billion of outflows in its investment management unit.