Morgan Stanley profit misses estimate as deals drought extends

MORGAN Stanley on Friday (Oct 14) reported a 30 per cent slump in third-quarter profit, missing analysts’ estimate as a slowdown in global dealmaking hurt its investment bank business, sending its shares down 1.7 per cent in early trading.

The outlook for deals has steadily worsened this year as the US Federal Reserve raised interest rates to tame inflation, clouding the economic growth outlook, while the highs of a record last year drew tough comparisons.

The bank’s investment banking revenue more than halved to US$1.3 billion, with declines across the bank’s advisory, equity and fixed income segments.

Global M&A lost ground for the third straight quarter with volumes in the United States plummeting nearly 63 per cent as the rising cost of debt forced companies to delay big buyouts.

Companies have also been delaying plans to go public amid depressed investor sentiment due to turmoil in financial markets triggered by the Ukraine war and rapidly rising borrowing costs.

For a dealmaking rebound, chief financial officer Sharon Yeshaya told Reuters both cost of capital and valuations need to stabilise.

When asked about potential headcount cuts amid the current challenging environment, she said the bank was constantly evaluating its resources.

Morgan Stanley’s net revenue in the quarter fell 12 per cent to US$13 billion. The bank reported a profit of US$2.49 billion, or US$1.47 per share, for the quarter ended Sep 30, compared with US$3.58 billion, or US$1.98 per share, a year earlier.

Analysts on average had expected a profit of US$1.49 per share and revenues of US$13.3 billion, according to Refinitiv IBES data. It was not immediately clear if the reported numbers were comparable with the estimates.

Chairman and chief executive James Gorman said the bank’s performance was “resilient and balanced,” adding its wealth management unit helped the firm navigate a difficult environment.

In a note to clients, UBS analysts said the results were solid, but “noisy” as provisions came lower than expected, as well as the tax rate, offsetting negative performance fees.

Morgan Stanley joins rivals JPMorgan Chase and and Well Fargo which reported similar hits to their quarterly profit on Friday amid uncertain economic conditions that have led banks to build rainy day funds.

The investment bank increased its provision for credit losses to US$35 million from US$24 million a year earlier against the backdrop of rising fears of a recession in the United States.

Morgan Stanley’s wealth management business, which tends to generate steady income, was a surprise bright spot, posting a 3 per cent rise in revenue, helped by a 49 per cent jump in net interest income amid rising Federal fund rates.

Its return on tangible equity was at 14.6 per cent, down 5 percentage points from a year earlier. This fell well short of the bank’s long-term goal of 20 per cent, a JPMorgan analyst said.