Morgan Stanley's big earnings beat proves management can navigate tricky markets

Published Thu, Apr 14 202212:58 PM EDTUpdated Thu, Apr 14 20221:08 PM EDT

Morgan Stanley (MS) on Thursday reported stronger-than-expected earnings for the first quarter, thanks to the second-highest sales figure in the bank's history. Earnings per share of $2.02 exceeded the $1.72 expected by Wall Street analysts, while revenue hit $14.8 billion, well above the $14.2 billion expected by Wall Street analysts. Breaking down the top line one more step: non-interest revenue of $12.585 billion (down 8% year-over-year) exceeded expectations of $12.136 billion; while net interest income of $2.216 billion (down 6% over last year) exceeded the $2.077 billion consensus. Bottom line This was a strong quarter from Morgan Stanley as the firm's diversified business model allowed management to navigate a very difficult macroeconomic environment. As called out in Thursday's Morning Meeting , the results serve to put to bed some concerns we had about the firm's return on tangible common equity (ROTCE), trading and E-Trade performance. As a result, we expect shares to stabilize and grind higher over time. Moreover, CEO James Gorman called out a "strong and growing deposit base" and added that the recent rate hike from Federal Reserve "will have a near immediate [positive] economic impact" on the firm's business and supports the path to realizing projected margins of more than 30%. Key company metrics Before digging into the various operating segments, let's take a quick look at some key overall metrics: ROTCE: 19.8% vs. 17% expected Expense efficiency ratio: 69% (67.9% ex-integration costs) vs. 70% expected Common equity tier 1 (CET1) capital ratio: 14.5% vs. 15.7% expected Tangible book value per share (TBVPS): $39.91 vs. $40.96 expected Results by segment Institutional Securities net revenue of $7.657 billion far exceeded expectations of $6.224 billion thanks to strong trading revenues. Within the segment, the revenue results were as follows: Investment Banking: $1.634 billion (down 37% year-over-year) Equity: $3.174 billion (up 10%) vs. $2.731 billion expected Fixed Income: $2.923 billion ("essentially unchanged") vs. $2.25 billion expected Investment banking nearly doubled advisory revenue on the back of higher completed M & A transactions. That was enough to more than offset a significant decline in equity underwriting revenues, due in part to market uncertainty. Equity revenue was boosted by a strong performance across businesses and geographies, particularly in Europe, the Middle East, and Africa (EMEA). Lower credit product sales, meanwhile, were largely made up for by fixed income's higher commodity and foreign exchange revenue. Total expenses fell 9% to $4.826 billion as compensation expenses benefited from a reduction in discretionary compensation. Non-compensation expenses were up slightly. Wealth Management net revenue of $5.935 billion came up short versus expectations of $6.194 billion. Within the segment, the revenue results were as follows: Asset management: $3.626 billion (up 14% year-over-year) Transactional: $635 million (down 20%, excluding mark-to-market losses on certain employee deferred compensation plan investments) Net interest income: $1.54 billion (up 11%) Other: $134 million Asset Management sales benefited from higher asset levels. Transactional sales, however, took a hit due to a decrease in client activity. Net interest income benefited from lending growth. On the expense side, total expenses fell 1.4% to $4.349 billion as a small decline in compensation expenses was partially offset by a small increase in non-compensation expenses. On management's conference call with investors, Gorman said the E-Trade integration "continues to go very well" and that he expects "a significant portion" of the integration to be complete by the end of the year. Morgan Stanley closed its acquisition of the discount broker in October 2020. Investment Management net revenue of $1.335 billion missed the $1.51 billion consensus. Within the segment, the revenue results were as follows: Asset management and related fees: $1.388 billion (up 26%) Performance-based income and other: $53 million Asset management and related fees benefited from incremental revenues from the Eaton Vance acquisition, which closed in March 2021. Still total assets under management (AUM) took a hit from market volatility and outflows. Total AUMs came in at $1.4 trillion, down 8%. Total expenses were up 17% as both compensation and non-compensation expenses increased as a result of the Eaton Vance acquisition. Capital Returns Morgan Stanley repurchased 30 million shares in the quarter at an average purchase price of $95.20 per share, resulting in a return of capital to shareholders to the tune of $2.872 billion. Furthermore, the bank's board declared a quarterly dividend of $0.70 per share, payable on May 13, 2022, to shareholders of record on April 29, 2022. (Jim Cramer's Charitable Trust is long MS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

James Gorman, chairman and chief executive officer of Morgan Stanley, speaks during a Bloomberg Television interview in Beijing, China, May 30, 2019.

Giulia Marchi | Bloomberg | Getty Images

Morgan Stanley (MS) on Thursday reported stronger-than-expected earnings for the first quarter, thanks to the second-highest sales figure in the bank's history.

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