$200M fine takes a bite out of Morgan Stanley Q2 earnings

Wealth management wins, $200M fine highlight Morgan Stanley’s quarter

July 15, 2022 1:02 PM

For the second consecutive quarter, Morgan Stanley leaders reported sliding net revenues and income while offering up challenging conditions as the explanation. Still, Morgan Stanley CEO James P. Gorman praised his firm’s performance during what he called “a more volatile market environment than we have seen for some time.”

He also shouted out a wealth management arm that kept its losses to a minimum as one of the highlights of a difficult Q2.

“Strong results in equity and fixed income helped partially counter weaker investment banking activity.” Gorman said in quarterly earnings statements released Thursday. “We continue to attract positive flows across our wealth management business, and investment management continues to benefit from its diversification. Finally, we finished the quarter in a strong capital position to ensure we move forward with confidence.”

During the earnings call, Gorman also pointed out two notable headwinds . One is significant movement in investments related to deferred cash-based compensation plans that created significant drag on top-line revenues across the firm. Gorman said it is particularly notable for wealth management where the impact of revenues exceeded $500 million.

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The other is legal costs of $200 million that Gorman said reflect the “likely resolution of regulatory investigations by the SEC and the CFTC regarding employees’ use of unapproved personal devices and the firm’s recordkeeping requirements.”

Scroll down for some of the key takeaways from Thursday’s earnings report and call.

Wealth management recap

Morgan Stanley Wealth Management reported net revenues of $5.7 billion, down from $6.1 billion one year ago.

Officials said asset management revenues increased 2%, reflecting higher asset levels driven by continued positive fee-based flows and partially offset by lower market levels compared to last year. Meanwhile, transactional revenues dropped by 17%, excluding the impact of “mark-to-market losses on investments associated with certain employee-deferred compensation plans.”

Net interest income increased to $1.75 billion from $1.26 billion last year on higher

interest rates and continued bank lending growth, and pre-tax income was $1.5 billion compared with $1.6 billion a year ago.

“Net new assets in wealth management of over $50 billion, despite the volatility and clients’ tax-related withdrawals in the quarter, underscored the scale of our business and its power to attract assets,” Gorman said in a statement. “And in the face of a sharp decline of equity markets, wealth management delivered a strong PBT and improved margin supported by the benefits of rising rates.”

About that $200 million fine

As a broad U.S. investigation into the use of unapproved personal devices continues, Bloomberg reports that amount expected to be paid by Morgan Stanley is based on discussions the firm has had with the SEC and the CFTC, who have been probing the matter across Wall Street.

Finance firms are required to scrupulously monitor communications involving their business. Bloomberg reports that the system, already challenged by the proliferation of mobile-messaging apps, was strained further as firms sent workers home shortly after the start of the COVID-19 outbreak. Investigators have been looking into banks including JPMorgan Chase, Citigroup and Goldman Sachs.

Total non-interest expenses for Morgan Stanley in Q2 totaled $9.71 billion, higher than the $9.53 billion analysts were expecting.

By the numbers

Morgan Stanley reported net revenues of $13.1 billion for the first quarter of 2022, down from $14.8 billion reported one year ago.

The bank posted net income of $2.5 billion, or $1.39 per diluted share, compared to $3.5 billion, or $1.85 per diluted share, for the same period a year ago. Those results fell short of analyst estimates of $13.48 billion in net income, or $1.53 per diluted share.

“Our revenues declined versus the prior year and reflected a loss of $413 million. Mark-to-market losses on corporate loans held for sale, including event loans offset by gains on hedges, were $282 million. This reflected the widening of credit spreads,” Morgan Stanley Chief Financial Officer Sharon Yeshaya said during the firm’s earnings call with analysts, according to a transcript by Seeking Alpha.

Morgan Stanley also announced the repurchasing of $2.7 billion of its outstanding common stock during the quarter, completing a $12 billion buyback plan announced last year.

No recession worries

During Thursday’s call, Gorman touched on the topic of a severe U.S. recession, stating that he sees it as unlikely. He said If he had to use one word to describe the current macroeconomic environment, “complicated” would be the winner.

“We have the Russian invasion of Ukraine, obviously, an historic occasion. We have historically low rates with very significant rate increases going around the world. We have got the tail of COVID. We have got obviously the fears of inflation and actual inflation,” Gorman said, according to a Seeking Alpha transcript.

As complicated as it is, Gorman contends that it isn’t “2008 complicated,” stating that what is being experienced today is a different type of financial stress in the system, and declaring that the banking sector is much stronger now than it was in the late aughts.

“I won’t speak for others, but (Morgan Stanley is) in specifically much better shape,” he said. “We are long in the U.S. in our businesses, largely because wealth management is almost entirely U.S., and the U.S. is yet again sort of a great region to be in.

“And yes, while we might head into some form of recession — and I, like many of others, have tried to handicap it. But we are frankly guessing at this stage, but I think it’s unlikely to be a deep and dramatic recession at least in the U.S.