Morgan Stanley chief James Gorman has warned that investment banking revenues may not recover until next year after the Wall Street group’s net profit fell by nearly a fifth in the first quarter.
A prolonged slowdown in investment banking activity has hit Morgan Stanley and its rivals, as the financial turmoil that followed the collapse of regional lenders in the US and Credit Suisse in Europe kept dealmakers on the sidelines.
Gorman told analysts on Wednesday that mergers and acquisitions, as well as debt and equity underwriting activity, “remain very weak” but said that revenue will eventually come back.
“Already, we’re seeing an increasing pipeline of mergers and acquisitions and some spring-like indications of new issues coming up. It remains very much the story of the half of 2023 and the whole of 2024,” Gorman said during the bank’s first-quarter earnings call.
Growth in the wealth management division, which was central to Gorman’s success in boosting the share price, failed at the start of 2023 to offset the sluggishness caused by a slowdown in investment banking.
Morgan Stanley shares fell by 0.6 percent in morning trading in New York.
Net income applicable to shareholders was $2.98 billion in the first quarter, down 19 percent from the same period last year. Analysts expected quarterly net income of $2.92 billion, according to data compiled by Bloomberg.
Investment banking revenue at Morgan Stanley fell 24 percent to $1.2 billion, just above analyst estimates of $1.1 billion and in line with similar declines at other large Wall Street banks.
Revenue from fixed income trading, which has benefited in the past 12 months from sharp increases in interest rates at central banks and market volatility around the war in Ukraine, fell 12 percent to $2.6 billion.
That beat analysts’ estimates of $2.4 billion, but still trailed rivals JPMorgan, Citigroup and Bank of America where revenue was either flat or rising. Goldman Sachs reported on Tuesday that fixed income trading returns fell about 17 percent.
The bank’s wealth management division reported revenues of $6.6 billion in the first quarter, up 11 percent from the same period last year and ahead of analysts’ expectations. The division also pulled $110 billion in net new assets during the quarter.
In recent years, Gorman has grown money management operations at Morgan Stanley with deals for ETrade and Eaton Vance, telling analysts Wednesday that “we’re going to do more acquisitions.”
“There is absolutely no doubt about that. It will be in the wealth and asset management business, and we constantly keep a list of hotties and who would fit in,” he said, before adding that “nothing is forthcoming.”
Morgan Stanley said deposits, which were a big focus for investors after the Silicon Valley collapse in March, fell 3 percent to $340.9 billion, from $350.6 billion in the previous quarter. Many of Morgan Stanley’s deposits come from wealthier clients who tend to be less affluent and more likely to withdraw their money in search of a better rate.
Sharon Yeshaya, chief financial officer at Morgan Stanley, told the Financial Times that the collapse of SVB had led to an outflow of deposits into products such as money market funds and US Treasuries, but many of those assets remain in the bank’s possession.
Earnings were hurt by the bank’s quadrupling of its provisions for potential credit losses to $234 million, up from $57 million a year ago, which it said was primarily related to commercial real estate and a worsening macroeconomic outlook.