Morgan Stanley delivered mostly better-than-expected first-quarter results Tuesday morning, a much-needed report for the bank whose shares have underperformed industry peers and tested our patience. Revenue for the three months ended March 31 rose 4% yr over yr to $15.14 billion, beating expectations of $14.41 billion, in response to estimates compiled by LSEG. According to LSEG, earnings per share (EPS) rose 19% to $2.02 in comparison with the identical period last yr, beating expectations of $1.66. Morgan Stanley Why we own it: We own Morgan Stanley as a result of the recovery in IPO and M&A activity, in addition to growth in asset management, which is enabling more everlasting fee-based revenue. We also imagine the bank’s excess capital supports further shareholder returns through buybacks and dividends, while enabling additional growth investments. Competitors: Goldman Sachs Weight in Club Portfolio: 4.03% Last Purchased: October 18, 2023 Initiated: July 12, 2021 Bottom Line The headlines were strong, and Morgan Stanley’s net interest income (NII) miss was significantly greater than offset through the strength of its fee-based revenue streams across the business. In recent years, Morgan Stanley’s management team has aggressively sought to expand these fee-based revenue streams – particularly in asset management – to scale back its exposure to rate of interest fluctuations. We are pleased with the primary quarter results and imagine the bank is heading in the right direction to attain its longer-term financial objectives. Morgan Stanley benefited from a mix of “higher asset prices and an improving macroeconomic environment,” resulting in strength in asset management, CEO Ted Pick said on the conference call. The momentum of long-dormant mergers and acquisitions (M&A) and initial public offerings drove strong year-over-year growth in investment banking, a key area we expected to see a recovery this yr. Additionally, the bank saw total customer assets increase to $7 trillion, a notable milestone as management continues its efforts to succeed in $10 trillion as a long-term goal. “We have a clear path to $10 trillion in client assets in wealth management and investment management. “We remain focused on supporting clients on their advisory journey, deepening existing client relationships and leveraging our scaled platform to deliver sustainable pre-tax profits of 30% over time,” CFO Sharon Yeshaya said on the decision in response to the outcomes. Morgan Stanley’s Common Equity Tier 1 (CET1) ratio supports continued shareholder returns without compromising the bank’s ability to proceed investing for growth. the efficiency ratio was well below estimates (the lower the higher); and ROTCE (Return on Tangible Common Equity), a key metric within the valuation of monetary institutions, significantly exceeded expectations. All of those aspects greater than offset the small loss we suffered in tangible book value per share. MS YTD Mountain Morgan Stanley Morgan Stanley YTD shares rose greater than 2% after Tuesday’s earnings release and conference call, constructing on Monday’s modest gains that ended a three-day losing streak. Last Thursday was the worst: Shares fell 5.3% after news that federal regulators were examining how Morgan Stanley vets clients for its wealth management division. Pick, who took over as CEO earlier this yr, said on the decision: “This is not a new matter. We have been focused on our customers’ onboarding and monitoring processes for some time. We are in constant communication with our regulators, as are all major banks. Pick added: “The associated costs are largely in the cost ratio.” As a result of the investigation, no strategic changes are planned and management does not see any impact on the bank’s ability to operate. Segment Comment Looking at the Segment Sales section of the earnings table below, Institutional Securities’ sales significantly exceeded estimates thanks to better-than-expected results across all sub-segments. Investment banking revenues rose 16% year-on-year as equity offering revenues more than doubled year-on-year thanks to an increase in initial public offerings and follow-on offerings. Fixed income income also rose thanks to higher bond issuance. On the other hand, advisory revenues fell as the number of completed M&A transactions declined. Equity trading revenues increased 4% year-over-year, driven by broad-based strength across both key businesses and across geographic regions. The company also saw “notable strength in derivatives,” which include things like options and futures contracts, in response to a press release. Fixed income trading revenue fell 3.5% year-on-year as macro and credit client activity declined, although this was partially offset by a rise in commodity-related revenue. Total segment costs (not included within the table) decreased 1.1% to $4.66 billion, with slight decreases in each compensation and non-compensation expenses. The reported pre-tax margin was 34%, in comparison with 28% in the identical period last yr. Management expressed optimism concerning the future path of investment banking. “We expect the steady buildup of this business to continue,” Yeshaya said. “We are confident concerning the state of the advisory and underwriting pipelines. While rate of interest uncertainty and geopolitical developments may impact near-term pipeline implementation, conditions should improve over time. And the underlying trends suggest that confidence is increasing.” Sales in Morgan Stanley’s wealth management segment hit a new record and were overall stronger than expected. Asset management revenue increased 13% compared to the same period last year, reaching a new record thanks to higher asset holdings and the impact of positive fee-based asset flows. The company raised $95 billion in net new money in the quarter, much more than the $62 billion expected by Wall Street analysts. “In fee-based inflows this quarter, we saw particular strength in the migration of assets from advisor-led brokerage accounts to fee-based accounts,” Yeshaya said. “This shows that assets move through the funnel into recurring, revenue-generating accounts over time. Fee-based assets now exceed $2 trillion.” Transaction revenue increased 12%, or 9% when excluding the impact of market valuation on investments related to certain deferred cash-based employee compensation programs. The growth was linked to an increase in structured products volumes, which coincided with the rise in equity markets. Net interest income beat Wall Street expectations but still fell 14% year over year as the benefit of higher interest rates was more than offset by an unfavorable change in the deposit mix. Management said it expects net interest income in the current quarter to be broadly consistent with what we generated this quarter, indicating it will likely be in line with analyst expectations. Total segment costs increased about 6% annually to $5.08 billion. The segment’s pre-tax margin was 26.3%, above the consensus estimate of 24.6%. In particular, the combination of the deferred cash-based compensation program and another small special assessment from the Federal Deposit Insurance Corp. reduced the segment’s pre-tax margin by around 1.15 percentage points. The Investment Management segment fell short of expectations. Asset management and related fees increased nearly 8% compared to the same period last year due to higher average assets under management, benefiting from increased asset values. Performance-related and other income decreased by approximately 24% compared to the previous year, although we should note that this is not a very material line item with sales of only $31 million. Total segment expenses increased 1.2% annually to $1.14 billion as an increase in non-compensation expenses was only partially offset by a slight decrease in compensation expense. Return on Capital Morgan Stanley repurchased 12 million shares in the first quarter at an average purchase price of $86.79 per share. The result is a $1 billion return of capital to shareholders. At current share price levels, Morgan Stanley has an annual dividend yield of 3.75%. Given the company’s CET1 ratio of 15.1%, Morgan Stanley has plenty of excess capital to both continue to invest in growth and return some of it to shareholders. (Jim Cramer’s Charitable Trust is long-MS. See a full list of stocks here.) As a subscriber to 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 foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. 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The signage is posted in front of Morgan Stanley & Co.’s headquarters in New York’s Times Square district.
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Morgan Stanley delivered mostly better-than-expected first-quarter results Tuesday morning, a much-needed report for the bank whose shares have underperformed industry peers and tested our patience.
