Story by Forbes
Morgan Stanley CEO James Gorman is hard at work building a wealth management business to provide stability and consistent earnings for the standalone investment bank, but a strong quarter for the firm’s trading desks never hurts. On Monday, the bank reported better-than-forecast first quarter earnings, bolstered by strong trading results, particularly in equities, and improving margins at its wealth management division.
Morgan Stanley reported adjusted earnings per share of $1.18 on net revenue of $9.9 billion, sharply exceeding estimates. Analysts polled by Bloomberg expected the bank to earn adjusted EPS of 78-cents on revenue of $9.19 billion. Excluding gains from a tax benefit on the repatriation of foreign earnings, Morgan Stanley’s 85-cents in EPS still beat estimates by a wide margin.
“This was our strongest quarter in many years with improved performance across most areas of the firm,” CEO James Gorman said in a statement. “It reflects our ongoing strategy to build platforms for growth while maintaining a prudent risk profile and disciplined expense management,” he added.
Trading proved a tailwind for Morgan Stanley in the quarter, surprising analysts. Equity trading revenue rose nearly 35% to $2.3 billion in the quarter, while fixed income currency and commodity trading rose over 11% to $1.9 billion. Those results belied expectations Morgan Stanley would fall short of competitors such as Goldman Sachs and JPMorgan, which reported surging trading revenues on heightened volatility in the quarter.
Analysts had the bank to post flat results versus year-ago figures. Fixed income currency and commodity trading was expected to fall 6.7% year-over-year to $1.54 billion, while equity trading was expected to come in at $1.81 billion.
Morgan Stanley’s growing wealth management division continued to show improving performance, signaling that Gorman remains on track in hitting strategic benchmarks set at the beginning of the year. The unit generated $3.83 billion in first quarter revenue, and $855 million in operating profits, in line with expectations.
With over $2 trillion in assets under management, wealth management is crucial to Gorman’s goal of de-emphasizing trading and increasing market share in more stable businesses like asset management. The unit hit a targeted pre-tax margin of 20% in 2014 and is expected by Gorman to reach pre-tax margins of between 22% and 25% by the end of the year. As of the first quarter, Gorman is on track to hit those targets – margins were 22% for the first quarter.
One area of weakness for Morgan Stanley was its investment bank, which reported declines in debt and equity underwriting revenue, hampered by falling loan volumes and a slow quarter for initial public offerings. The unit’s revenue of $1.17 billion fell slightly short of analyst estimated. However, M&A advisory revenues were a bright spot, rising over 40% to $471 million, bolstered by strong corporate merger and acquisition activity.
“[W]hile much of the positive EPS surprise was trading driven, we believe other positive elements, notably cost control (Wealth management and Institutional Securities compensation) should give shares a boost amd drive positive estimate revisions,” Steven Chubak, an analyst with Nomura Securities said in a report.
As a result of strong earnings and bolstered capital levels, which passed Federal Reserve reviews in March, Morgan Stanley increased its quarterly dividend 50% to 15-cents a share. The bank also announced a $3.1 billion share repurchase authorization beginning this quarter and extending through mid-2016.
Morgan Stanley shares were less than 1% in early trading at $36.86. Shares have gained nearly 20% over the past-12 months.