By Manya Saini and Tatiana Bautzer
(Reuters) - Morgan Stanley (NYSE:MS)'s profit beat expectations as wealth management revenue climbed in the first quarter, offsetting slumps in investment banking and trading revenue.
The bank earned $1.70 per share, beating analysts' average estimate of $1.62 per share, according to Refinitiv data. Its stock edged 0.5% higher to $90.34 in afternoon trading.
The Wall Street powerhouse set aside $234 million in the quarter to cover souring loans, rising from $57 million a year ago, as it braced for a recession and weakness in the commercial real estate market. The provisions were linked to a handful of loans.
"We are not in a banking crisis, but we have had, and may still have, a crisis among some banks," Morgan Stanley CEO James Gorman told analysts on a conference call after the results were announced. The turmoil caused by the collapse of two lenders in March was not "remotely comparable" to the 2008 mortgage crash, he said.
Morgan Stanley joined other U.S. banking behemoths, including JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and Wells Fargo (NYSE:WFC) & Co, in reporting profits that beat earnings forecasts in the first quarter. The lenders raked more income thanks to higher interest rates and stayed resilient despite the industry tumult.
Morgan Stanley's wealth management revenue jumped 11% to $6.6 billion versus a year earlier. The division brought in $110 billion in net new assets, of which only about $20 billion came from regional banks after the March turbulence, Chief Financial Officer Sharon Yeshaya told Reuters in an interview.
Gorman, known for a string of transformational deals, said Morgan Stanley will continue to make acquisitions in wealth and asset management, but said a transaction was not imminent.
The decline in investment banking activity dragged total revenue down nearly 2% to $14.5 billion in the quarter.
Investment banking revenue was better than expected, but still low, Oppenheimer analyst Chris Kotowski wrote in a note to clients.
"While the key investment banking and asset management fee lines are under pressure given the environment, a 16.9% return on tangible equity is a very respectable performance," Kotowski wrote.
Wall Street's investment banks have suffered the most from a downturn in mergers and acquisitions as investors grew more cautious about volatile markets and rapidly rising interest rates. Initial public offerings slowed to a virtual standstill as startups put off market debuts until investor sentiment improves.
Global mergers and acquisitions activity shrank to its lowest level in more than a decade in the first quarter of 2023, with volumes slumping 48% to $575.1 billion as of March 30, compared to a year earlier, according to data from Dealogic.
Stock trading revenue sank 14% to $2.7 billion as equity markets fell, while fixed income revenue declined 12% to $2.5 billion.
"The outlook for the remainder of this year is difficult to predict," Yeshaya said. "We are keenly aware that opening and functioning markets and economic stability are integral in aiding confidence moving forward."
Gorman expected the Federal Reserve to raise interest rates one or two more times to a range of 5% to 6%. "If we get through that, many people are calling for a modest recession," setting a more constructive tone for an economy recovery, he said.
The CEO cited risks weakness in commercial real estate, geopolitical tension, banking sector stress and uneven economic growth worldwide.
"It kind of reminds me of the Rolling Stones song, you can't always get what you want, but you get what you need," he said.
Rival Goldman Sachs Group Inc (NYSE:GS) also reported a slump in its investment banking unit as dealmaking and bond trading slumped and it lost money on the sale of some assets in its consumer business.
Meanwhile, banking giants JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc reaped windfalls from higher interest payments, while setting aside billions of dollars to prepare for a worsening economy.
COMMERCIAL REAL ESTATE A CONCERN
Some of the largest U.S. banks also singled out office commercial real estate last week as an area of growing concern, with property values falling and more borrowers defaulting on their loans amid rising interest rates and a slowing economy.
While investment banks like Morgan Stanley and Goldman remain relatively insulated from the broader contagion worries of the crisis, the uncertainty has weighed on the economic outlook, which is key for dealmaking.
Profit applicable to the bank's common shareholders for the three months ended Mar. 31 fell 20% to $2.8 billion.
“Morgan Stanley reported another healthy quarter benefiting from a diverse business model" after years of acquisitions, Fadi Massih, a senior analyst at Moody’s Investors Service, wrote in a note. Stability in wealth management offset subdued investment banking, he wrote.