Morgan Stanley and Bank of America highlighted the two big themes that dominated US banks’ earnings season this week, as the former swept to record profits on a trading boom and the latter was battered by provisions for loan losses.
As the coronavirus fallout drove the economy into a steep recession, Morgan Stanley was the only one of the big US banks to report an increase in profit for the second quarter against the same period last year.
Its attributable net income came in at an all-time high of $3.2bn for the quarter, against the $2.2bn the bank earned a year earlier and the $1.8bn that had been expected by analysts in a Bloomberg poll.
The “standout” was Morgan Stanley’s investment bank, chief executive James Gorman told analysts. Trading revenues rose 68 per cent, including a 168 per cent increase in fixed income revenues, while investment banking fees were up 39 per cent year on year.
Cumulatively, that left Mr Gorman’s bank with a better result than the rest of Wall Street’s big names other than Goldman Sachs, with the group enjoying higher revenues as market volatility during the pandemic prompted a frenzy of trading activity and fundraising.
“Clearly, it will be challenging for the back half of 2020 to meet the record for first-half results,” Mr Gorman said, echoing the forecasts of other bank bosses on the inevitable deterioration of an exceptional trading environment and fading of a boom in debt issuance.
The wealth business, where Morgan Stanley typically makes about half of its money, increased revenue by 6 per cent, while its investment management division increased assets under management to $665bn.*
Morgan Stanley’s credit charges of just $239m stood in contrast to the $10.5bn of loan loss provisions at JPMorgan Chase, which earlier in the week reported that second-quarter profits had fallen more than 50 per cent year on year. Citigroup took $7.9bn of credit charges, and suffered a 73 per cent profit fall on the same basis.
“We don’t have exposure to unsecured consumer credit, we have very little emerging market credit, we have very little small business middle market lending. It’s by design,” Mr Gorman told analysts.
As one of the US’s biggest lenders, Bank of America enjoyed no such immunity. The bank booked $5.1bn of loan loss provisions to deal with the wave of potential defaults as the pandemic cripples the finances of businesses and households. That pushed second quarter net income down by 52 per cent to $3.3bn, less than half the $7.1bn the bank posted a year earlier.
Still, BofA’s loan loss provisions were significantly lower than most peers. Paul Donofrio, chief financial officer, said this was because his bank focused on individuals with higher credit scores and tended to have “lower concentration in unsecured consumer credit”. He added: “If you look at the high risk industries that everybody’s talking about, we’re lower there as well.”
The lower provisions drew attention from analysts, but probably not in the way that BofA had hoped. “The credit provisions was less than we were expecting, and in this environment the market thinks, bigger is better,” said Jeff Harte, of Piper Sandler. “When you have the earnings, why not be conservative?”
Morgan Stanley also used its earnings briefing with analysts to underscore its intention to lift shareholders’ payments in the medium term, weeks after the Federal Reserve introduced new rules capping payouts at recent earnings levels and banning share buybacks until at least October.
“I would love to expand the dividend in time . . . and obviously getting back on the buyback train,” said Mr Gorman. “We don't want to sit on this capital.”
BofA chief executive Brian Moynihan offered some optimism for the future. Even though spending had been “levelling off on a weekly basis” as reopenings were paused or reversed, he said, “July's actually running ahead of last year” for consumer spending.
But the outlook remains uncertain. “Nobody in this world can predict what the next month is going to be like, never mind the rest of the year,” Mr Gorman noted.
Shares in Morgan Stanley were up 1.6 per cent in early trading at $52.16, while Bank of America was down 3.8 per cent at $23.66.
*This article has been amended to correct the figure for Morgan Stanley’s investment management division
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