Lenders complete strong earnings season, lifted by economy,
lower taxes
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 (July 19, 2018).
Morgan Stanley's second-quarter earnings rose 39% from a year
ago, wrapping up a big-bank earnings season that showed continued
strength in the economy and few signs that global tensions are
spilling over into the financial sector.
The smallest of the big six U.S. banks by assets reported $2.4
billion in profit on $10.6 billion revenue. Earnings per share of
$1.30 beat the $1.11 expected by analysts polled by Thomson
Reuters. Revenue also topped expectations by about $500
million.
The last time Morgan Stanley reported two consecutive quarters
of $10 billion-plus revenue was 2007, just before the financial
crisis took hold. Its $21.8 billion revenue over the first six
months of 2018 is a firm record.
The bank, run by Chief Executive James Gorman, is in the late
innings of a multiyear turnaround effort. Mr. Gorman's push into
wealth management -- Morgan Stanley manages $2.4 trillion on behalf
of about 3.5 million U.S. households -- has steadied its earnings
and reassured investors, who had stayed away after repeated
burns.
Mr. Gorman, who turned 60 last week, appears to be in harvesting
mode and has shown little appetite to set ambitious new targets or
chase new businesses.
"A member of my team [asked me] recently, 'what's our strategy?'
How about 'make some money?'" Mr. Gorman said Wednesday.
Shares rose more than 2.7% in afternoon trading, outpacing other
bank shares.
Steady economic growth, lower taxes, an uptick in demand for
loans, and renewed volatility in the price of some securities have
all helped big banks this year. Goldman Sachs Group Inc., Morgan
Stanley's closest peer, on Tuesday reported its best first half in
nine years.
So far, escalating global tensions, trade battles and a
shrinking gap between the cost of short- and long-term debt --
which has historically signaled a coming economic pullback --
haven't spooked investment funds and corporations that use banks to
trade securities, advise on deals and arrange financing.
"Corporations feel good, consumers feel good," Morgan Stanley's
finance chief, Jonathan Pruzan, said in an interview Wednesday.
"The pockets of volatility seem to be isolated and not rolling over
into the broader market.
"If that changes, and it starts to put people in defensive mode,
we'll have different second half of the year," he said.
Morgan Stanley's return on equity, a measure of how profitably
it invests shareholders' money, stood at 13% in the quarter,
hitting the goal Mr. Gorman had set -- though with an assist from
the lower taxes.
For the last few years, Morgan Stanley's giant retail brokerage
has been the star, gathering assets and churning out reliable
profits. This quarter, though, its Wall Street businesses
shone.
Combined trading and investment-banking revenues of $5.7 billion
were 20% higher than last year and capped the best first-half in
those businesses since 2007. Fees from merger advice, stock-trading
and stock-underwriting were all up double digits from a year ago.
Debt trading and underwriting, businesses where Morgan Stanley is
smaller, grew but less dramatically.
The quarter provided a boost for Ted Pick, a longtime trading
executive who just last week was given oversight for investment
banking, too. The move put the 49-year-old in charge of all the
firm's Wall Street businesses and marked him as a frontrunner to
eventually succeed Mr. Gorman, who is likely to stay on another
three to five years.
Morgan Stanley's banking assets, the loans and other instruments
sitting in its regulated banking entity, topped $200 billion for
the first time in the quarter. The firm converted to a Main Street
bank during the financial crisis and has been pushing to grow that
business. Corporate loans were up 21% year over year.
On the consumer side, where the firm has been pushing mortgages
and loans backed by brokerage portfolios, progress has been
hard-won, slowed down by its decision to bring more of its mortgage
business in-house last year.
A new savings-like account has boosted deposits, meaning the
firm will need to ramp up lending as quickly or else lose money on
interest. "The bank will remain a very important source of growth,"
Mr. Gorman said.
Morgan Stanley's smallest division, asset management, posted a
4% increase in revenue. Mr. Gorman has a soft spot for that
business -- which accounts for just 7% of the firm's overall
revenue but requires little capital to run -- and is aiming to grow
it, in part through acquisitions.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 19, 2018 02:47 ET (06:47 GMT)
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