Morgan Stanley’s earnings beat the street in the second quarter, and it wasn’t even close, thanks to a big jump in investment banking fees and Morgan's ability to skirt the subprime issues that affected other Wall Street firms.
Net income for the quarter ending May 31 rose to $2.58 billion from $1.84 billion. The 41% jump translated into a profit of $2.45 per share. That’s 44 cents above expectations.
Revenue rose 32% to a record $11.5 billion from $8.7 billion last year.
“Morgan Stanley showed us in the second quarter, relative to the others, that subprime was a trivial matter for them,” said Fox-Pitt, Kelton analyst David Trone.
Analysts cited a strong showing overseas and in trading, but perhaps the most dramatic difference was investment banking. Revenues were up 65% at $1.7 billion, which was the most of any other firm.
“In every major investment banking area, they increased their market share,” said Richard Bove of Punk, Ziegel & Company. “And in the most important area at present time, which is mergers and acquisitions, two out of every five dollars that was spent in M-and-A in the quarter that just ended was spent at Morgan Stanley.”
The positive business flow in investment banking might be best exemplified by Morgan Stanley landing the plum–and lucrative–assignment of co-leading the underwriting of the Blackstone public offering, which will be priced on Thursday.
It should be noted that year-to-date, in terms of the overal value of investment banking deals, Goldman Sachs remains on top of the mergers game with about $30-billion more in deals than Morgan Stanley.
“With Goldman (Sachs), at least in my opinion, (Morgan Stanley) has one of the two dominant franchises around the globe, and it's just starting to take on some of the risk that some of their peers have been taking on in prior years,” said Jeffery Harte, managing director of equity research at Sandler O’Neill, in an interview on CNBC’s “Squawk on the Street.”
The appetite for risk and a more aggressive approach to investment banking are two things emphasized by CEO John Mack when he took over the company’s top job two years ago.
“He’s been willing to take risks by putting up the firms capital in many different areas,” said Bove.
The next step for Mack and Morgan Stanley is to spin off its Discover credit card division, which is expected to happen next week.