Morgan Stanley Slides As Sales & Trading Disappoint; Credit Loss Provisions Soared

Morgan Stanley beat on the top- and bottom-lines and saw record wealth management revenues in Q2.

• Earnings: $1.24 vs $1.15 est.

• Revenue: $13.46 billion vs $13.08 est.

Under the hood, the picture was mixed across segments with wealth management revenues beating (at a new record high) and sales & trading revenues down notably YoY and NIM missed.

• Wealth Management revenue BEAT – $6.66bln (up 16% YoY and above exp. 6.5bln).

• Fixed income revenue MISS (and down 31% YoY) – $1.716bln (exp. 1.97bln. prev. 2.5bln Y/Y).

• Equity revenue BEAT (but down 14% YoY) – $2.548bln (exp. 2.38bln, prev. 2.96bln Y/Y).

• Investment Banking revenue BEAT – $1.075bln (prev. 1.072bln Y/Y).

• Net interest income – MISS $2.01bln (exp. 2.38bln, prev. 2.346bln Q/O. 2 282bln Y/Y).

On trading, the equities decline was tied to a drop in cash and derivative products on lower client activity and volatility, while FICC saw a drop “across most products, with the exception of rates.”

The firm’s fee-based asset flows – a key indicator for the wealth management business – beat a consensus of estimates of $21.24 billion, coming in at $22.7 billion for the quarter (however, that’s well down from $28.5 billion in the same period last year).

On the other side of the ledger, expenses came in at $10.5 billion, higher than expected.

That included $308 million in severance costs, according to the press release.

Finally, total provision for credit losses is also up year-over-year by 59%, coming in at $161 million; which the firm partially attributed to “credit deteriorations in the commercial real estate sector as well as modest growth across the portfolio.”

CEO James Gorman weighs in, saying the bank delivered results through a “challenging market environment.”

“The quarter started with macroeconomic uncertainties and subdued client activity, but ended with a more constructive tone,” he said.

“We finished the quarter in a strong capital position and raised our quarterly common dividend by 7.5 cents for the second year in a row. We remain confident in our ability to grow in various market environments while maintaining a strong capital position.”

Vital Knowledge analyst Adam Crisafulli weighs in on Morgan Stanley’s results:

“The headline numbers are OK, but some of the details are disappointing, including FICC revenue and GWM margins (although there was a 1x severance issue with GWM margins), and a few low-quality sources of upside bolstered results (including “other” revenue within Institutional Securities and a low tax rate).”

Morgan Stanley shares are down from last night’s close after earnings, having sold off since the headlines prompted a kneejerk higher….

A similar ‘sell the news’ scenario was evident on Friday after bank earnings.