Morgan Stanley stock is 3.5% higher after reporting another “stellar”, as Bloomberg called it, quarter with beats across the board, especially in trading and investment banking, in contrast to Goldman’s somewhat soft earnings report.
The bank reported Q2 EPS of $1.30, handily beating estimates of $1.11, on revenue of $10.6BN, half a billion above the $10.1BN expected, and compared to $9.5BN a year ago.
Morgan Stanley reported that its effective tax rate from continuing operations was 20.6% in Q2, in line with that of Goldman and somewhat higher than expected, reflecting “the impact of intermittent net discrete tax benefits of $88 million primarily associated with new information pertaining to the resolution of multi-jurisdiction tax examinations and other matters
This was the second consecutive quarter in which Morgan Stanley reported over $10BN in revenue, as well as the 13th consecutive quarter in which Morgan Stanley reported higher revenues than Goldman.
Commenting on the result, CEO James Gorman said, “We reported robust revenue and earnings growth this quarter with strength across all businesses and geographies. The second quarter performance reflected active markets and healthy client engagement. Our strong global franchise positions us well to continue to grow organically across each of our businesses and to deliver operating leverage.”
More importantly, unlike Goldman there were no complaints about a lack of market volatility during the quarter.
The revenue beat was solid and carried across all key investment banking product lines:
- Investment banking revenue $1.7BN vs $1.4BN y/y, with advisory rev. of $618MM vs $504MM on higher levels of completed M&A activity across all regions.
- Equity underwriting rev. $541MM vs $405MM y/y driven, like in Goldman’s case, by higher revenues on IPOs.
- Fixed income underwriting revenues of $540MM vs $504MM, driven by junk bond loan fees.
Sales and trading was just as strong, with net revenue rising to $3.8BN from $3.2BN a year ago, with beats also in every vertical:
- Equity sales and trading net rev. $2.5BN vs $2.2BN on “strong performance” across all products, particularly in financing business
- Fixed Income sales and trading net rev. $1.4BN vs $1.2BN on higher results in commodities, credit products
What is notable here, is that as Bloomberg’s Laura Keller notes, “Morgan Stanely achieved trading greatness this quarter even as it saw a drop in its value-at-risk. VaR of $44 million in the second quarter declined on both a sequential and year-over-year basis.“
In the bank’s key product line, wealth management, net revenue rose to $4.3BN vs $4.2BN a year ago..
- Asset mgmt rev. $2.5b vs $2.3b on higher asset levels, positive flows
- Transactional rev. $691m vs $766m, reflecting lower fixed income rev., lower gains on investments associated with employee deferred compensation plans,
On the expense side, and in contrast with Goldman which saw its accrued comp shrink as noted yesterday, compensation expense rose to $4.6BN vs $4.3BN y/y on higher revenues meaning that suddenly it’s more lucrative to be a MS banker over GS; Separately, non-comp expenses rose to $2.9BN vs $2.6BN Y/Y on higher volume driven expenses; expense efficiency ratio 71% vs 72% y/y, reflecting “continued expense discipline.”
Finally, during the quarter ended June 30, 2018, the Firm repurchased approximately $1.25 billion of its common stock or approximately 24 million shares. The Board authorized a share repurchase of up to $4.7 billion of common stock beginning in the third quarter of 2018 through the end of the second quarter of 2019.
MS also declared a quarterly dividend to $0.30 per share, a 20% increase from $0.25 per share, payable on August 15, 2018 to common shareholders of record on July 31, 2018.
As a result of the strong earnings, the bank’s stock spiked 4% higher in kneejerk reaction, although it has since trimmed some of the gains. The earnings lifting the rest of the bank sector with Bank of America and Goldman both higher.
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