Morgan Stanley's profit falls short, but trading beats estimates on market volatility

Key Points
  • The bank said earnings dropped 30% to $1.7 billion, or $1.01 a share, compared with analyst expectations of $1.14.
  • It also warned that a sole bright spot for the financial industry, robust trading results, may prove to be fleeting.
Morgan Stanley first-quarter profit misses analysts' expectation
Morgan Stanley first-quarter profit misses analysts' expectation

Morgan Stanley on Thursday posted first-quarter profit that missed analysts' expectations and warned that a sole bright spot for the industry, robust trading results, may prove to be fleeting.

The bank said earnings dropped 30% to $1.7 billion, or $1.01 a share, compared with the $1.14 estimate of analysts surveyed by Refinitiv. Companywide revenue of $9.49 billion was also below the $9.73 billion estimate. Morgan Stanley shares dipped less than 1%.

Morgan Stanley said the coronavirus pandemic impacted each of its major businesses, creating turmoil in financial markets that hit the value of loans, investments and some trading assets, and sapped interest income and investment banking fees. At the start of 2020, that was partly offset by robust trading results that benefited from the sudden surge in volatility, but the bank warned that the boost could peter out as the crisis wears on.  

"Though we are unable to estimate the extent of the impact, an extended period of depressed economic activity necessitated to combating the disease, and the severity and duration of the related global economic crisis, will adversely impact our future operating results, and the attainment of our financial targets," the bank warned. It added that the new environment might feature "many of the same negative impacts and without the potential benefit of higher client trading activity experienced in the first quarter."  

The firm's massive wealth management division posted revenue of $4.04 billion, an 8% decline that missed analyst estimates, on lower interest income and asset values. Revenue in the investment management division fell 14% to $692 million, below the $757.8 million estimate, as the bank took asset writedowns. 

As with rival banks, trading results were strong: Revenue jumped 30% from a year earlier, and fixed income desks generated $2.2 billion in revenue, half a billion dollars more than expected. Equities desks also outperformed, making $2.42 billion in revenue, almost $200 million more than expected. 

Investment banking revenue slipped 1% to $1.14 billion, below the $1.26 billion estimate, as higher debt issuance couldn't entirely make up for lower activity in IPOs and lower demand for M&A advice. 

But results in the institutional securities division, which houses trading and advisory businesses, were damaged by a $610 million mark-to-market loss on loans held for sale and a $388 million provision for credit losses, potentially tied to the energy sector. 

Under Chief Executive Officer James Gorman, Morgan Stanley has emphasized its wealth management division as a steadier business than its trading operations. But Morgan Stanley still has the biggest stock trading business on Wall Street, and rivals have reported large gains from trading during a volatile first quarter.

"Over the past two months, we have witnessed more market volatility, uncertainty and anxiety as a result of the devastating COVID-19 than at any time since the financial crisis," Gorman said Thursday in the statement. "While it's too early to predict how this will unfold, Morgan Stanley navigated the quarter well given the conditions, and our results bear testament to the strength of our balanced business model."

Analysts asked Gorman about the performance goals the bank announced in January. The bank said it would hit companywide returns of 13% to 15% within two years, and 15% to 17% beyond that.

"We in a wild period," Gorman said Thursday in a conference call. "We're going to go have negative GDP of, I don't know, 30%."

They can still achieve their two-year targets, but they need the operating environment to normalize, and it would be "irresponsible of me to recommit to those targets on this call," Gorman said. 

Morgan Stanley is the last of the six largest U.S. banks to report results. JPMorgan Chase, Bank of America, Wells Fargo, Goldman Sachs, and Citigroup all posted sharp declines in profit tied to the coronavirus pandemic. 

Here's what Wall Street expected:

Earnings: $1.14 a share, 18% lower than a year earlier, according to Refinitiv

Revenue: $9.73 billion, 5.4% lower than a year earlier

Wealth management: $4.28 billion, according to FactSet

Trading: Equities $2.23 billion, fixed Income $1.71 billion