Morgan Stanley Hit by Banking Slump as Recession Fears Loom
Surging inflation and Federal Reserve efforts to help combat it have put investors on watch for a recession and the spillover effect an economic contraction can have for financial firms.
July 14, 2022 at 12:36 PM
4 minute read
Morgan Stanley's revenue from investment banking plummeted as capital markets seized up, underlining a slow quarter for Wall Street as a dour outlook for the economy muddles the path forward.
The firm's investment-banking group posted $1.07 billion in revenue, down 55% from a year earlier, a bigger decline than the 47% drop analysts had predicted. The bank also reported an additional $413 million hit driven by mark-to-market losses on corporate loans held for sale as credit spreads widened.
Morgan Stanley's trading unit helped pick up the slack as fixed-income revenue surged amid heightened volatility and clients scrambled to reposition their books.
Surging inflation and Federal Reserve efforts to help combat it have put investors on watch for a recession and the spillover effect an economic contraction can have for financial firms. Banks' capital-markets units, which have lifted fortunes across the industry over the past two years, were hurt by a sharp slowdown in the second quarter.
"It was a very solid quarter in the face of market volatility," Chief Financial Officer Sharon Yeshaya said in an interview. "Market activity and client activity should help support the level in equities and fixed-income businesses. But the volatility delays some of the pipeline to convert on the investment-banking side, especially on the M&A side."
JPMorgan Chase & Co., which reported results earlier Thursday, suspended share buybacks as Chief Executive Officer Jamie Dimon said he's "mindful of economic uncertainties."
Morgan Stanley shares slumped 23% in the first six months of the year, its worst performance for two consecutive quarters in more than a decade.
Trading revenue of $5.46 billion surpassed the $5.1 billion average estimate, and was up from $4.51 billion a year ago. That was mostly led by a 49% jump in fixed-income revenue, which climbed to $2.5 billion.
"Strong results in equity and fixed income helped partially counter weaker investment banking activity," CEO James Gorman said in a statement.
Revenue from equity underwriting plunged to $148 million, while debt underwriting declined 49% to $326 million. Advisory revenue fell 9.9% to $598 million.
Last week, Morgan Stanley picked two veteran dealmakers as the new heads of its investment-banking group. Eli Gross, who led the transportation and infrastructure banking practice, and Simon Smith, who helmed the European banking franchise, have both been at the bank since 1998. They take over from Susie Huang and Mark Eichorn, who were named executive chairs.
On the outlook for mergers and acquisitions, "the speed in the market movement, and the speed in price discovery has caused people to stop," Yeshaya said. "It's unclear if sellers have yet digested those prices."
The New York-based firm was also first to lend credibility to Elon Musk's attempt in April to buy Twitter Inc. by helping cobble together the financing for the $44 billion bid. Since then, it has also been dragged into the ensuing mess after the world's richest man changed his mind about wanting to own the social-media platform.
Wealth management, where Morgan Stanley is anticipating higher net interest income this year as a result of rising rates, reported revenue of $5.74 billion in the second quarter, down 5.9% from a year earlier. Net new assets fell 26% to $52.9 billion.
The bank posted net inflows despite having "double than average tax outflows this year," Yeshaya said. The firm will also boost its guidance for net interest income, with the Federal Reserve moving faster to raise rates in recent months, she said.
The company disclosed Thursday that it expects to pay a $200 million fine "related to a specific regulatory matter concerning the use of unapproved personal devices and the firm's record-keeping requirements." Regulators have been probing the matter across Wall Street. Morgan Stanley's total non-interest expenses totaled $9.71 billion, higher than the $9.53 billion analysts were expecting.
Sridhar Natarajan reports for Bloomberg News.
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