Morgan Stanley is outrunning its Wall Street rivals throughout the crisis. The investment firm has managed to capture that rarest of beasts: profit growth. In a tough quarter, when rivals’ bottom lines were hit by higher credit costs (charges against loans), Morgan Stanley leapt over consensus estimates with a 45 per cent rise in net income.
The bank’s small exposure to consumer and commercial lending meant that it could avoid stockpiling reserves for potential bad loans. It also highlights the strength of the business model. Wealth management fees anchor its revenue growth, smoothing out the feast or famine scenario of its trading and investment banking units.
For now, Morgan Stanley is enjoying a feast. Volatile market conditions have brought about a trading bonanza. Companies rushing to raise cash have generated fat fees for debt and equity underwriters. Its trading revenues rose 71 per cent year-on-year to $4.7bn. Within this, fixed-income trading revenue was up 167 per cent, besting anything seen at its rivals.
Unfortunately, the boom in debt trading and issuance is unlikely to last. Chief executive James Gorman acknowledged as much on Thursday, echoing comments made this week by his counterpart at JPMorgan, Jamie Dimon. Any slowdown on those fronts will, however, be cushioned by the wealth management division. This brought in revenues of $4.7bn over the quarter on a fat pre-tax margin of 24.4 per cent. Net interest income at more than $1bn, thanks to stable client deposit balances, also surprised analysts.
All of this, plus expense discipline, meant that Morgan Stanley’s return on equity actually rose to 15.7 per cent during the second quarter. That compares very favourably with 11.1 per cent at Goldman Sachs and is more than twice the figure reported by JPMorgan.
After years of trading at a discount, Morgan Stanley now commands a slight premium to Goldman on a price-to-book value basis. That is well earned and deserves to be higher. Mr Gorman deserves every credit for putting the company on a stronger footing.
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