Morgan Stanley recently reported its Q4 earnings. In response to the release, the share price rose by 5.8%.
- Can this improvement be sustained?
- What did we really learn from the Q4 earnings call?
Here’s our summary of the highlights from Morgan Stanley’s Q4 results.
It’s Been a Complex Year
The earnings call was littered with details of the complexity of the markets in which the bank operates. Here are some highlights commented on during the call:
- Global volumes in underwriting markets have fallen to levels not seen for two decades
- Debt volumes have contracted since the first quarter
- Interest in M&A has collapsed, and activity in high quality has been limited
- The economic outlook has weighed on sentiment, and high inflation has dented confidence
- Rising interest rates have been both a help and a hindrance
Wealth Management Is Booming
The Wealth Management (WM) division is a bright spot in Morgan Stanley’s business. The bank has deliberately moved towards a business model more heavily geared to WM, which now accounts for more than 50% of its revenues.
As CEO James Gorman said on the call:
“Wealth Management has gone through a powerful transformation, as you all know, including with the most significant recent acquisitions in E*TRADE and Solium, which have expanded our client base with two new channels.”
Boosted by net interest income and strong lending growth, the division reported revenues of $6.62 billion – an increase of almost 6% from a year earlier.
Equity Trading Revenues Dip
Market volatility has not helped Morgan Stanley’s trading operations. Q4 revenues were dented by falling equity markets and client deleveraging. Equity trading suffered a dropped of 24% to $2.2 billion from a year ago. Despite this, equity trading posted full-year revenues of $10.8 billion – 6% lower than in the full year 2021 but in line with the $10 billion goal they set.
On the flip side, and bolstered by rising interest rates, fixed income delivered its highest contribution for more than 10 years, with a full-year outturn of $9 billion in revenues.
Investment Banking Suffers
At $5.2 billion for the full year, the bank’s investment banking arm posted a drop of 49% year-on-year. This reflected a challenging environment for its underwriting operations and M&A activity.
Equity underwriting revenues crashed by 73% to just $227 million and debt underwriting slumped by 38% to $314 million. Advisory revenues in M&A fell by 34%.
On the quarter, revenues in the investment banking arm fell by 17% to just $1.46 billion. Quarterly client engagement fell from the elevated levels seen earlier in the year, but this is partly to be expected due to seasonality. What didn’t help this year was the current macroeconomic environment.
Morgan Stanley Is Actively Managing Its Cost Base
Turning to its costs, CFO Sharon Yeshaya discussed business integration expenses, severance costs, and extraordinary charges.
It incurred around $120 million in integration-related expenses in the fourth quarter ($470 million for the full year) and expects to incur another $325 million in the coming year, related to its current acquisitions.
In Q4, the bank also paid severance expenses of $133 million. These related to previously announced job cuts affecting around 1,600 employees, but will reduce its fixed cost base.
Overall, the bank said that its operating costs remained broadly unchanged from a year earlier.
Lending Is Up – So Are Provisions Against Credit Losses
Morgan Stanley has nearly doubled its lending balances in three years. In the last year, these have grown by 17% to $146 billion.
Lending growth has certainly paid off this year, with net interest income of more than $2 billion in Q4 alone – an increase of 52% compared to Q4 2021.
Simultaneously to growing its loan book, Morgan Stanley has improved its capital position. CEO James Gorman commented that:
“We have 200 basis points of excess capital above our regulatory requirement. This is intentional. Our capital strategy has focused on bringing the risk down in our businesses, and we’ve seen a steady decline in our SCB excluding the dividend add-on reflective of our more durable business mix. Our capital position gives us enormous flexibility, and we’re comfortable with our decision to be prudently positioned.”
Gorman says that this excess capital position will give the bank the ability to continue to invest in its business and make further acquisitions – business integrations that have enabled it to increase the dividend by 11% in 2022, as well as make further share repurchases.
Summing Up
Morgan Stanley’s business transformation is helping it to stabilize its revenues.
Looking forward, James Gorman believes, “Greater economic clarity should lead to increased confidence to undertake strategic transactions. And looking ahead, we expect issuers to take advantage of these windows of opportunity.”
Morgan Stanley has benefited from the current higher-interest rate environment. If interest rates should fall, savings balances are likely to do the same, and net interest income, too. Though trading volumes may rise.
Growth in the coming years may depend upon meeting its tough target of reaching $10 trillion in assets under management. With a target of $1 trillion of new assets every three years, that’s a long-term target from its current level of around $4 trillion. Acquisitions are likely to be key – and acquisitions have to be paid for.
The bank says that 2023 has started well, but there is always a caveat. As Sharon Yeshaya remarked:
“We have seen a healthy start to the year. A lot of it hinges on the economic outlook and whether we have seen a peak in inflation and a policy pivot.”
With shares currently trading at around $96.25, on a PE ratio of 15.65 (around the long-term average for MS shares), the stock price appears fairly valued.
However, with a dividend yield of 3.22%, a forward dividend of $3.10 for 2023, and a payout ratio of less than 50%, the shares could make a valuable long-term addition to an income portfolio.