Morgan Stanley's Brokers, Traders Counter Dealmaking Decline

(Bloomberg) -- Morgan Stanley’s bond traders weathered tough markets with a smaller decline than analysts expected, while the bank also eked out a surprise jump in wealth-management fees.

Bond-trading revenue fell 9 percent, a smaller drop than at rival Goldman Sachs Group Inc. and less than the 15 percent slump analysts had estimated. Revenue rose at the firm’s wealth and asset management units, helping it counter the biggest slump in investment-banking fees on Wall Street.

Morgan Stanley generates nearly all its revenue from fees tied to the markets, a larger share than rivals such as JPMorgan Chase & Co. that leaned on their retail-banking units in the first quarter. Trading fell at all Wall Street firms as clients remained on the sidelines after a tumultuous end to 2018 and some new issues were delayed by a U.S. government shutdown at the beginning of the year. Chief Financial Officer Jonathan Pruzan said trading and dealmaking is turning around in the early weeks of the second quarter.

While the firm’s profit fell 9 percent from a year earlier, Morgan Stanley followed the pattern of every Wall Street bank in surpassing earnings estimates that had steadily declined over the first three months of the year.

Morgan Stanley’s bond traders recovered after a challenging fourth quarter. Equities revenue, however, fell short of expectations. The bank has been the No. 1 stock-trading shop on Wall Street.

The company’s shares rose 1.1 percent to $47.52 at 9:35 a.m. in New York. They’ve gained 19 percent this year, more than the 14 percent increase in the S&P 500 Financials Index.

The 24 percent drop in investment banking was led by declines in equity and debt underwriting. It still ended last year as the top banker for initial public offerings, and has a key role in the listings of companies such as Uber Technologies Inc., which should help support the division into this year.

Morgan Stanley had a weaker quarter for advisory services because fewer mergers and acquisitions were completed during the period, Pruzan said in an interview.

“M&A is actually quite healthy -- a lot of ingredients are in place to expect another robust year,” he said, citing a strong pipeline for deals. By comparison, Goldman said its backlog was lighter. “We gained market share in that business last year. We would expect to maintain or grow that market share.”

Pruzan, on a conference call with analysts, said prime-brokerage balances are steadily increasing while still lower than the levels of the first nine months of 2018. Clients at that business, which is No. 1 on Wall Street and serves hedge funds, are still cautious on the markets, he said.

Chief Executive Officer James Gorman said there’s a “very high bar” for potential acquisitions, but Morgan Stanley is still looking at opportunities. “We’re definitely not compulsively trying to buy stuff,” he told analysts. The bank is close to completing the purchase of stock-plan administration company Solium Capital Inc., its largest takeover since the financial crisis.

Morgan Stanley’s wealth-management unit had revenue of $4.39 billion, up slightly from a year earlier, as net interest income climbed 6 percent, driven by growth in bank lending and higher rates.

What Bloomberg Intelligence Says

“Morgan Stanley has shifted focus toward its more-stable wealth management segment, which is reflected in its senior-parent bonds trading tighter than those of similarly rated Goldman Sachs.”

--Arnold Kakuda, credit analyst
Click here to read the research.

To contact the reporter on this story: Sonali Basak in New York at sbasak7@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Daniel Taub

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