Morgan Stanley delivered a solid quarter, despite gathering macroeconomic clouds

Published Wed, Apr 19 20232:40 PM EDTUpdated Wed, Apr 19 20239:54 PM EDT

Club holding Morgan Stanley (MS) reported better-than-expected first-quarter results on Wednesday, even as the stock came under pressure due to rising expenses. But the results, including stellar non-interest income, were impressive in a challenging economic environment. Revenue declined 2% year-over-year, to $14.52 billion, but outpaced analysts' expectations of $13.92 billion, according to estimates compiled by Refinitiv. Earnings-per-share dropped by 16% annually, to $1.70, but exceeded the $1.62 per share forecasted by analysts, Refinitiv data showed. Morgan Stanley stock initially tumbled nearly 4%, before reversing some of those losses to rise just under 1% in afternoon trading Wednesday, to about $90.50 a share. Bottom line An increase in provisions for credit losses and higher-than-expected compensation expenses weighed on shares early in Wednesday's session — but Morgan Stanley, nonetheless, reported a solid first quarter. Notably, the increase in provisions was due to pressure in the commercial real estate market, the deteriorating macroeconomic outlook and a higher estimate for the Federal Reserve's main interest rate, all of which are out of management's control. Net interest income came in a tad short versus expectations, but we're more focused on the better-than-expected results coming from the non-interest income side of the business. That income — the bulk of which is generated in the wealth management division — is fee-based, which makes it less volatile because it's not reliant on interest-rate fluctuations. As a result, it stands to support a higher valuation multiple, given the consistent, recurring revenue. Institutional securities were down annually, a result of lower underwriting and M & A activity. But the management team said Wednesday they're already seeing growth in the M & A pipeline and "some spring-like signs of new issuance emerging," though the real rebound won't be realized until the second half of 2023 and into 2024. Asia was a bright spot for institutional securities, delivering its third-highest quarter on record, driven by Japan and China's economic reopening. In the wealth management division, the bank was able to pull in about $110 billion in net new assets for the quarter. Morgan Stanley aims to grow net new assets by $1 trillion every three years, which amounts to about $333 billion per year. That makes $110 billion in the first quarter a solid start to achieving that nearer-term goal, ahead of the bank's longer-term objective of amassing $10 trillion in client assets. We were also pleased to hear management cite positive international momentum at its investment management division, helped by its acquisition of asset management firm Eaton Vance. Despite a difficult operating environment, Morgan Stanley remains a best-in-class investment bank. As the macroeconomic picture improves, we expect the bank to be able to expand top-line growth and reduce expenses. We maintain a 2 rating on the stock — meaning we would wait for a pullback before buying up more shares — and a price target of $105 per share. In the meantime, we're content to collect the 3.5% yield the stock currently offers, while management leverages the lower price to repurchase more shares. Segment results Institutional securities Investment banking revenues contracted as a result of lower advisory fees in connection with reduced M & A activity; a decline in equity underwriting revenues due to lower initial public offering volumes; and a fall in fixed-income underwriting revenues as a result of fewer non-investment grade loan issuances. Equity revenues were down on lower volumes and global equity market declines. Fixed income revenue suffered from a decline in commodity prices and foreign exchange-related revenues. Total expenses fell 2.3% annually, to $4.72 billion, while provisions for credit losses increased to $189 million, from $44 million a year ago. The increase in provisions reflects the growing risks being seen in the commercial real estate market and worsening macroeconomic outlook. Wealth management Asset management revenue was down on lower asset levels, due to market declines. Transactional revenue was up nicely on a reported basis, but fell 12% annually when including the impact of mark-to-market gains on investments associated with deferred compensation plans. Net interest income was higher on the back of rising interest rates and lending growth. Total expenses for the segment increased 10.4% annually, to $4.8 billion, while provisions for credit losses increased to $45 million, up from from $13 million a year ago, due to the firm's worsening macroeconomic outlook. Notably, the bank added roughly $110 billion in net new assets in the first quarter, $20 billion of which management believes was the result of outflows from regional banks following the collapse of Silicon Valley Bank last month. Management noted that the regional banking crisis in the U.S., coupled with rising interest rates over the past year, resulted in a 3% decline in deposits in the first quarter. That was, in part, due to clients increasing their allocations to cash equivalents like money market funds and U.S. Treasurys by over 60% year-over-year. Roughly 23% of client assets are being held in these cash-like securities, well above the roughly 18% level seen historically, management said Wednesday. Investment management Asset management and related fees fell as a result of lower assets under management, which were hit by lower asset prices and outflows. Performance-based income and other were up, in part due to mark-to-market gains on investments connected with deferred compensation plans. Total assets under management fell largely as a result of lower asset values compared with a year ago. Total expenses for the segment increased 1.4% annually, to $1.12 billion. Capital returns Morgan Stanley repurchased 16 million shares in the first quarter, at an average purchase price of $95.16 per share, resulting in a return of capital to shareholders of $1.5 billion. There is about $14.25 billion remaining under the current buyback authorization, as of the start of the second quarter. Looking ahead, the board authorized a quarterly dividend of nearly 78 cents per share. (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. 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The Morgan Stanley headquarters is seen in New York City on Jan. 17, 2023.

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