Morgan Stanley tops estimates despite bond trading woes
New York — Morgan Stanley’s adjusted quarterly profit topped Wall Street estimates on Thursday as strength in underwriting and wealth management offset a sharp but expected decline in bond trading revenue.
The lender issued new targets that show it will continue to focus on making wealth management more profitable while also bringing overall costs down, moves aimed at ironing out the swings of its more volatile businesses.
Like most other big US banks, Morgan Stanley took a fourth-quarter charge due to a US tax overhaul signed into law in December, but analysts have been looking past those one-time hits to focus on the long-term benefits of lower tax rates.
Morgan Stanley’s underwriting business was a bright spot, particularly in equities, which was helped by the bank’s leading position in initial public offerings. Underwriting revenue rose 42% to $915m, while revenue from other parts of the institutional securities unit declined.
Wealth management also posted revenue gains and its 26% pretax profit margin topped CEO James Gorman’s targeted range for the year. Morgan Stanley lifted that target to 26% to 28% for this year and next.
Gorman has for years been shifting Morgan Stanley away from risky, volatile businesses that crippled the bank during the 2007-09 financial crisis, and expanding areas that generate consistent fees, like investment banking and wealth management.
On a call to discuss the results, Gorman noted Morgan Stanley had met or exceeded all the goals he laid out in early 2016.
But analysts appeared to be disappointed by some of his new targets, repeatedly characterising his latest wealth management goal as conservative and asking why he would not aim higher.
Gorman became exasperated at one point, responding, "Oh my God," before going through his rationale again.
Shares of the sixth-largest US bank rose 1% to $55.89 in morning trade.
Overall, Morgan Stanley’s fourth-quarter earnings fell 66% to $516m, or 29c per share, from $1.7bn or 81c per share, in the same period a year earlier.
Excluding the tax charge and other items, adjusted profit was $1.68bn, or 84c per share. Analysts on average were looking for 77c per share, according to Thomson Reuters I/B/E/S.
Total revenue rose 5% to $9.5bn from $9.02bn in the year-ago quarter. Analysts were expecting $9.2bn.
Morgan Stanley’s $1.2bn tax hit was smaller than other banks that have reported results, and most of it came from changes in deferred tax assets, which are future tax benefits that drop in value when the corporate rate falls.
The bank expects a 22% to 25% tax rate this year, down from 31% last year. Morgan Stanley has been paying residual taxes on profits held abroad, chief financial officer Jonathan Pruzan said in an interview, and so did not have a one-time mandatory tax charge on those earnings the way rivals including Citigroup, JPMorgan Chase & Co and Goldman Sachs Group did.
Beyond wealth management, Morgan Stanley also reached Gorman’s annual goals for return on equity and average quarterly bond trading revenue.
Excluding the tax charge, its return on equity was 9.4% last year. The lender wants to continue improving how well it generates profits from shareholder capital, and now has a medium-term target of 10% to 13%. And while Morgan Stanley’s bond trading revenue plunged 45% in the quarter, the business still delivered more than $1bn in average quarterly revenue for the full year.
Gorman has said the business needs to generate at least that much to be sustainable.
Morgan Stanley is also working to keep its efficiency ratio, which measures expenses relative to revenue, to less than 73%, down one percentage point from its prior target. Last year it posted an efficiency ratio of 72.6%. All Wall Street banks, particularly Goldman Sachs, have faced big declines in bond trading due to historically low market volatility.