Trading Powers Morgan Stanley to 45% Profit Jump -- 3rd Update
July 16 2020 - 10:25AM
Dow Jones News
By Liz Hoffman
Morgan Stanley's second-quarter earnings rose 45% as the
coronavirus ripped through the U.S. economy and financial
markets.
The bank reported revenue of $13.4 billion and profit of $3.2
billion, or $1.96 per share, on Thursday. Both were quarterly
records for the firm and well above the expectations of Wall Street
analysts, who had predicted profit of $1.77 billion, or $1.12 per
share.
Morgan Stanley and Bank of America Corp. were the last of the
big U.S. banks to report financial results for a period that posed
the biggest test of the financial system since 2008. Results shook
out along recognizable lines: Big commercial and consumer lenders
like JPMorgan Chase & Co. and Bank of America took provisions
for loan losses that dragged down earnings, while a surge in
securities trading and underwriting favored Wall Street-heavier
firms such as Morgan Stanley and Goldman Sachs Group Inc.
That flips a script that dictated bank profits for a decade. The
long recovery from 2008 favored big Main Street lenders closely
tied to the U.S. consumer, who borrowed and spent heavily during a
period of rising employment and steady economic growth. That same
calm, sunny outlook sapped markets of the kind of volatility that
keeps trading desks busy.
The pandemic brought "all sorts of massive uncertainty," said
Chief Executive James Gorman, who himself contracted Covid-19
earlier this year. "Some of that uncertainty, as we just
demonstrated, played to our favor."
Morgan Stanley's wealth-management brokerage, the country's
largest, brought in $4.7 billion in revenue during the second
quarter. Mr. Gorman often calls the unit, which clips fees managing
nearly $2.7 trillion of clients' money, a ballast that steadies the
firm while its Wall Street businesses of deals and trades provide
the power.
That engine purred in the second quarter. Morgan Stanley's
trading revenue rose 68% from the same period a year ago to $5.6
billion, its highest in a decade. Chief Financial Officer Jonathan
Pruzan said in an interview that average client balances in the
firm's trading arm were 15% lower in the second quarter than in the
first and that computer-driven "quant" funds, for which Morgan
Stanley is the leading broker on Wall Street, were slower to return
to the market.
The firm's investment bankers generated $1.6 billion in revenue
helping companies sell stock and debt to the public, two-thirds
higher than a year ago. Corporate bond issuance hit a year-to-date
record of more than $1 trillion by the end of May, showering fees
on bankers who placed that debt with investors. The surge also
helped banks in another way, by giving companies the cash to repay
bank credit lines they drew on in the early days of the pandemic --
loans banks nervously funded, hoping they would be paid back
quickly.
Mr. Pruzan said the firm had "consciously avoided consumer
credit" as well as commercial banking, which means it is less
exposed to a wave of defaults that looks increasingly likely as
much of the U.S. economy remains shut down. Its loans to companies
and trading clients are mostly highly rated and backed by assets
such as real estate and securities portfolios, he said.
The bank's return on equity, a measure of how profitably it
invests shareholders' money, rose to 15.7%, above the high end of a
target range set last year by Mr. Gorman. Morgan Stanley also
remains comfortably above a minimum capital level it will have to
hit starting this fall.
Like other big banks, Morgan Stanley is temporarily barred from
buying back shares or significantly increasing its dividend, which
the Federal Reserve hopes will help preserve cash for banks to
weather the downturn. But Mr. Gorman said he was eager to "get back
on the buyback train" given the cushion his firm has over minimum
requirements.
"We don't want to sit on this capital," Mr. Gorman said. "We
want to put it to work."
He said Morgan Stanley remains on track to complete its pending
acquisition of E*Trade Financial Corp. late this year. The deal,
struck just before the pandemic hit and valued at the time at $13
billion, is meant to bring in new clients to the firm's wealth arm,
upgrade Morgan Stanley's technology, and introduce the blue-blooded
firm to a younger generation of investors.
Though it is known for its dot-com vibe and quirky television
ads, E*Trade's crown jewel is a lower-key business: managing the
stock that employees at hundreds of companies receive as part of
their pay. Those shares are typically locked up for a few years and
when they become available, Morgan Stanley aims to move those
employees into brokerage accounts. It also has international
ambitions for the U.S.-centric E*Trade.
The deal will also bring some $38 billion in deposits. Morgan
Stanley, which doesn't have branches or traditional bank accounts,
has been trying to grow deposits as a low-cost source of funding.
That is more crucial than ever as the pandemic -- and the recession
that is likely to stretch on -- puts stress on banks' finances.
In the meantime, costs to integrate E*Trade shaved about 1
percentage point off the profit margin in Morgan Stanley's retail
brokerage, which slipped below the 28% level Mr. Gorman has been
targeting.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
July 16, 2020 10:10 ET (14:10 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
E TRADE Financial (NASDAQ:ETFC)
Historical Stock Chart
From Jun 2024 to Jul 2024
E TRADE Financial (NASDAQ:ETFC)
Historical Stock Chart
From Jul 2023 to Jul 2024