MS Morgan Stanley

Firm joins Wall Street peers with standout results due to lower taxes, strong trading

By Liz Hoffman 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (April 19, 2018).

Morgan Stanley on Wednesday reported record quarterly profits, the last of the big U.S. banks to benefit from a potent cocktail of lower taxes, active markets, lower expenses and economies growing in lockstep.

The Wall Street firm's first-quarter profits of $2.6 billion and revenues of $11.1 billion were both record highs after reflecting accounting adjustments and jettisoned businesses. Morgan Stanley's traders had their best quarter since 2009, riding a wave of increased volume and volatility that also aided rivals, including Goldman Sachs Group Inc. and JPMorgan Chase & Co.

Combined profits at the six largest U.S. banks, which all reported first-quarter results in recent days, rose 24% from a year ago, outpacing an 18% rise in revenues. Meanwhile, the banks' level of profitability as measured by the return they generate on their equity -- a key gauge for shareholders -- rose to its highest level in years.

Much of that owes to lower taxes, which saved those firms $2.8 billion in the quarter, according to a Wall Street Journal analysis. But even without that boost, earnings would have been up about 15% from a year ago, thanks to banks holding firm on costs, including compensation.

The first quarter is typically the strongest of the year for banks. Investors put on new positions, which boost trading results, and companies raise money to fund new projects, which spurs lending and underwriting.

Morgan Stanley Chief Financial Officer Jonathan Pruzan said Wednesday that the optimism early in the quarter dulled a bit as trade unease and political noise intensified. "We'll have to see how the year plays out," he said.

Goldman Chief Executive Lloyd Blankfein delivered a similar message Tuesday to the bank's managing directors. "We've seen false dawns before, " he said.

And bank investors largely shrugged at the results, even as most of the firms beat expectations. That is due in part to the strong run-up in share prices and valuations between the November 2016 presidential election and the end of 2017. Shares of all six big U.S. banks are down since they began reporting results last Friday, even as the S&P 500 has risen around 2%.

Morgan Stanley's shares, while down during that period, rose on the back of its results Wednesday. Under CEO James Gorman, the firm is in the late innings of a revamp designed to make its revenues more predictable and decrease risk. It has doubled down on fee-based businesses like wealth management and eased its reliance on trading commissions and principal investments.

The firm in January set out new financial targets, most of which appear easily in reach. Morgan Stanley's return on equity of 14.9% in the first quarter is a postcrisis high, and easily beats the 13% goal Mr. Gorman laid out in January -- though with a big assist from the cut in the corporate tax rate.

One down note: Mr. Gorman appeared to temper investors' expectations for a large dividend and buyback increase in the upcoming Federal Reserve stress-test and capital-return process. He said the doomsday scenario imagined in the 2018 test was "more severe" than in past years and "that when you dial the scenario up to that level, it could lead to unintended consequences."

Morgan Stanley's stock-trading business, the biggest on Wall Street by annual revenues, was up 27% in the quarter. Prime-brokerage balances rose and equity derivatives, instruments that protect investors from swings in stock prices, were especially strong, Mr. Pruzan said.

The firm's fixed-income trading revenue rose 9% to $1.8 billion, its best quarterly tally in three years. Commodities trading, a big business for Morgan Stanley, and currencies, a smaller one, were both strong, Mr. Pruzan said. Credit trading and interest-rate products were weaker.

"We finally had an environment with more debate and more volatility around asset prices," Mr. Pruzan said.

Wealth-management revenues rose 8%. Pretax-profit margins held steady after last year hitting Mr. Gorman's goal of 25%. They have tripled since 2011 as the firm pushed mortgages and other loans to its clients and rode a bull market to higher management fees.

The stock market's recent declines -- it is down about 8% from January highs -- could threaten that fee stream. But because Morgan Stanley charges fees based on the value of portfolios at the beginning the quarter, not the end, that won't show up until the bank reports second-quarter results in July.

Revenue from advising on corporate mergers and underwriting both rose from a year ago. Morgan Stanley missed the biggest underwriting prizes of the quarter -- those went to Goldman, on Dropbox Inc.'s initial public offering, and Bank of America on a real-estate investment trust's debut -- but it pocketed more than $9 million for leading the IPO of home-security firm ADT Inc., according to filings.

Asset management, a small but high-return business, reported an 18% rise in revenue. Mr. Gorman has made growing that unit a priority.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

April 19, 2018 02:47 ET (06:47 GMT)

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