When Morgan Stanley Chief Executive James Gorman warned in mid-June that the trading environment during the second quarter was “challenging,” he may have been underselling the bank’s predicament. Morgan Stanley equities and fixed income traders suffered through the worst quarter among the five big U.S. investment banks, at least when it comes to year-on-year performances.
Equities trading revenue fell 14% compared to Q2 of 2018, the biggest drop at any major Wall Street bank. Fixed income traders also whiffed on expectations, posting revenues that were down 18% year-on-year. As you can see in the chart below*, M&A and debt capital markets (DCM) revenues also tumbled by double-digits. Morgan Stanley’s burgeoning equity capital markets (ECM) team was the only unit within its institutional securities business to book a stronger quarter than a year ago. However, the bank lost out on its cut of what would’ve been the year’s biggest initial public offering last week when Anheuser-Busch InBev SA’s Asia Pacific unit pulled out of its proposed listing.
But there is some good news. One of the chief reasons for the near across-the-board drop in trading and investment banking revenues is that Morgan Stanley booked a superb Q2 during 2018. Despite missing expectations, Chief Financial Officer Jonathan Pruzan was quick to point out on this morning’s earnings call that Morgan Stanley still remains the top equities sales and trading shop on the street. Moreover, the bank as a whole actually beat consensus revenue and earnings per share expectations on the back of a strong performance by the bank’s wealth management unit. Expenses were also down, though the firm took care of its traders and bankers similarly to last year. Compensations and benefit expenses as a percentage of net revenues remained at 35% within its institutional securities business while the size of the slice of pie only fell by 10% year-on-year.
Still, Q2 represents a coming-back-to-earth moment for the firm's traders and investment bankers. Morgan Stanley’s net income fell by the greatest percentage among all large U.S. banks.
**FICC results are after Tradeweb gains have been eliminated