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Morgan Stanley profit surges on M&A wave, advice to wealthy

Randy Mancini 8 Jan 19
FILE PHOTO: The logo for Morgan Stanley is seen on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City
FILE PHOTO: The logo for Morgan Stanley is seen on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 3, 2021. REUTERS/Andrew Kelly

January 19, 2022

By Matt Scuffham and Sohini Podder

(Reuters) -Morgan Stanley beat quarterly profit expectations on Wednesday by capitalizing on a boom in dealmaking and earning robust fees from managing assets for wealthy clients, sending the shares of the Wall Street investment bank up 5%.

Full-year profit as well as revenue was a record for the bank, which advised on some of the world’s biggest mergers during the year. Net income surged 37% to $15 billion and revenue jumped 23% to nearly $60 billion.

Morgan Stanley’s results rounded out a mixed earnings season for the nation’s largest banks that cashed in on the M&A wave, but were dragged down by weak trading and higher expenses, which swelled as they spent heavily to retain key personnel in a race for talent.

In 2021, Wall Street investment banking giants have advised on several major business combinations, initial public offerings (IPOs) and helped put together deals involving special purpose acquisition companies.

Morgan Stanley advised on 420 deals last year and was ranked third in the global investment banking league tables, following larger rivals Goldman Sachs and JPMorgan Chase, according to data from Dealogic.

League tables rank financial services firms based on the amount of investment banking advisory fees they generate.

M&A volumes are expected to remain robust despite the prospect of debt becoming costlier, while Main Street lenders are expected to post healthier profits from consumer lending as interest rates are set to rise later this year.

BEATING EXPECTATIONS

Overall revenue from institutional securities, which houses the Morgan Stanley’s investment banking and trading units, fell slightly to $6.7 billion, mainly due to weak trading.

Revenue from trading fell 26%. Equity trading revenue rose 13%, but the gains were wiped out by fixed income trading revenue which slumped 31% to $1.23 billion. However, investment banking revenue rose 6% to $2.43 billion in the quarter.

Equity underwriting revenue of $853 million was lower than last year even though Morgan Stanley advised on some of the biggest IPOs, including Amazon-backed electric vehicle maker Rivian Automotive Inc.

Its wealth management unit also turned in a strong quarter with a 10% rise in revenue to $6.25 billion powering a record annual profit.

However, the investment bank saw an 18% jump in compensation expenses to $24.6 billion, mainly due to the acquisition of fund manager Eaton Vance.

In the quarter ended Dec. 31, profit rose to $3.59 billion, or $2.01 per share and was above market expectations of $1.93 per share, despite the blow to trading.

Revenue rose to $14.52 billion compared with $13.59 billion in the year-ago period.

Return on tangible equity, a closely-watched metric for profitability that measures how well a bank is using its capital to produce profit, rose to 19.8%. The figure was well above the bank’s two-year target of between 14% and 16%.

Unlike larger rivals such as JPMorgan and Bank of America, both Morgan Stanley and its peer Goldman Sachs lack big consumer lending units, which has limited their exposure to pandemic-led loan defaults and allowed them to focus on their twin strengths in investment banking and trading.

Chief Executive James Gorman, however, has been taking steps to insulate the bank from its reliance on trading and engineered two large back-to-back acquisitions – Eaton Vance and E*Trade – to bolster its ability to gain clients in its wealth management and brokerage arms.

(Reporting by Sohini Podder and Manya Saini in Bengaluru and Matt Scuffham in New York; additional reporting by Mehnaz Yasmin; Writing by Anirban Sen; Editing by Arun Koyyur)