Morgan Stanley beats estimates as record deal-making cushions trading blow

[NEW YORK] Morgan Stanley reported a better-than-expected quarterly profit on Thursday, as its investment banking business benefited from record levels of capital market activity that helped offset a slump in fixed income underwriting.

Trading revenue at Wall Street banks was a sour spot in the second quarter, facing tough comparisons to the year-ago period when the Covid-19 pandemic first hit, causing wild volatility in the markets that provided opportunities for banks.

Equity trading for Morgan Stanley fell slightly from the prior quarter but was up overall from a year ago. Bond trading revenue fell to almost half of what it was a year earlier.

Net revenue of its institutional securities division, which houses the bank's largest reporting lines - sales and trading and investment banking - fell nearly 14 per cent to US$7.09 billion in the quarter.

Morgan Stanley shares were down 1.4 per cent in pre-market trade.

Rival investment bank Goldman Sachs Group reported earlier in the week its global markets business, which houses its trading desks, saw a 32 per cent decline in revenue, while JPMorgan Chase & Co, the largest US bank, also suffered from the well-flagged slowdown from last year's record-breaking trading results.

Morgan Stanley also joined its rivals in enjoying gains from a surge in deal-making activity in the first half of the year that smashed all-time records, with over 28,000 deals totaling volumes of over US$2.82 trillion being announced between January and June, according to data from Refinitiv.

Investment banking revenue rose 16 per cent at Morgan Stanley to US$2.38 billion, largely driven by gains from advising on deals and equity underwriting.

The bank, which advised on 216 deals in the first six months of the year, ranked third in the global M&A league tables during the quarter, behind Goldman Sachs and JPMorgan, according to Refinitiv.

The investment banking boost pushed Morgan Stanley's net income applicable to common shareholders to US$3.4 billion in the second quarter ended June 30 from US$3.05 billion a year earlier.

On a per-share basis, however, the bank's profit fell to US$1.85, while still beating analysts' average estimates of US$1.65 per share, according to IBES data from Refinitiv.

Net revenue rose to US$14.8 billion from US$13.9 billion.

Return on tangible common equity excluding integration related expenses came in at 19 per cent in the quarter, well above the bank's two-year target of between 14 per cent and 16 per cent set in January.

The metric measures how well a bank is using its capital to produce profit.

Even with the trading slowdown, Morgan Stanley's results cap a strong quarter for big US banks, after pandemic induced loan losses failed to materialise and the US economy began roaring back to life.

Morgan Stanley, which lacks a big consumer lending unit, reported a sharp drop in provisions for credit losses to US$73 million from US$239 million.

REUTERS