Morgan Stanley has continued the trend of slightly bleak Q3 reports from Wall Street banks. While M&A was the main bright spot, trading revenues in its investment bank - combined with poor performance elsewhere in capital markets - saw revenues tumble by 14% compared to the same period last year. This is what you need to know.
Yes, M&A is the place to work in investment banking currently, but Morgan Stanley’s advisory team has done particularly well. Revenues were up 42% year-on-year – compared to 27% at Bank of America and 23% at J.P. Morgan.
But Morgan Stanley’s M&A brought in $557m, compared to $503m at J.P. Morgan and $391m at Bank of America.
Equity capital markets revenues at Morgan Stanley were down by 46%. At J.P. Morgan they were down by 35%. But while debt capital markets divisions at most Wall Street banks managed to hold up (or improve), at Morgan Stanley revenues were down by 23%.
Morgan Stanley doesn’t break out headcount by division, but the overall compensation pot in its investment bank has been tumbling. It put aside $1.3bn aside for compensation in the third quarter – 26% less than at the same point in 2014. However, for the first nine months of the year, compensation is down by a mere 2%.
Morgan Stanley’s fixed income and commodities division was particularly badly hit by the slowdown in credit trading revenues that hit all Wall Street banks in Q3. Revenues were $918m, or a 19% slip on the same quarter in 2014, compared to a 16% drop at Goldman Sachs, an 11% decline at J.P. Morgan and a 12% slide at Bank of America Merrill Lynch. CEO James Gorman said that it was the worst quarter since the crisis for its core bond trading business.
Will Morgan Stanley be pulling out of any fixed income businesses, doing a ‘UBS’ and retreating entirely from capital intensive divisions? No. Well, maybe not. Morgan Stanley has already “radically restructured” its fixed income business, says CEO James Gorman, and the bank isn’t about to make any hasty decisions based on one “unusual” 13-week period. Gorman grew exasperated at analyst questions over FICC during the conference call, saying that it "is what it is".
Having said that, Gorman also said that if the underperformance in FICC was a long-term trend it would “take whatever steps we need to take”. Previous reports of Morgan Stanley hiring mortgage traders were "bizarre" said Gorman, when in actual fact the bank was hiring for mortgage advisers. Morgan Stanley is largely focused on "replacement" hires as it doesn't currently see any potential for expansion in fixed income.
However, Gorman signed off with the slightly ominous: “If we do not see opportunity, we will not keep the balance sheet in-house."
This is most likely down to the influx of graduate recruits in the third quarter, but overall headcount was 56,267, an increase of 472 on the previous three months.
FICC is not the same revenue powerhouse at Morgan Stanley as it is at other investment banks. Equities trading revenues by and large dwarf fixed income, and so it is in Q3. Morgan Stanley’s equity sales and trading revenues were $1.8bn, largely flat on this time last year (but 20% down on the second quarter).
Much of this was down to declines in cash equities, which were subject to “sporadic bouts of risk aversion” from clients, according to CFO Jonathan Pruzan.
Most banks have registered an increase in equities revenues this quarter, however. J.P. Morgan was up 10%, BAML by 12%. However, in absolute terms, Morgan Stanley’s equities traders are still generating $400-600m more than other investment banks.
It’s beginning to look like Morgan Stanley’s traditional areas of focus – wealth management and equities – are the best places to be. Wealth management revenues were up by $24m year on year. This doesn’t necessarily mean big hiring, however.
Financial adviser headcount was up by a mere 38 people quarter on quarter to 15,807, which Morgan Stanley puts down to an influx of trainees and reduced attrition. However, this is down from 15,915 in Q1.
Morgan Stanley’s investment management division posted a loss of $38m in the third quarter and revenues slipped from $667m to $274m. This, it says, was largely down to reversal of “previously accrued carried interest associated with the Asia private equity business”, largely in China, as well poorer performance in asset management.
In 2014, asset management was being vaunted as a much needed escape route for investment bankers. This may no longer be the case.
Compensation costs were also badly hit – they went from $253m in Q3 2014 to just $95m this year.