Morgan Stanley was the last of the five big U.S. investment banks to report first quarter earnings on Wednesday, and the firm capped off a rather disappointing season overall with what may be the worst Q1 performance amongst its rivals, at least when it comes to trading and investment banking.
While the bank actually beat analyst expectations based mainly on a surprise performance from its wealth management unit, Morgan Stanley’s institutional securities group, which houses its trading and investment banking teams, saw a 15% drop in net revenues year-over-year. What makes Morgan Stanley’s performance stand out from rival banks is that revenues fell across the board within its investment banking and trading units, with M&A bankers putting forth the worst quarter in terms of year-on-year comparisons.
As you can see in the chart below, Morgan Stanley saw double-digit drops in equity capital markets (-19%), debt capital markets (-22%), advisory (-29%) and equity sales and trading (-21%). The best performers within the bank’s institutional securities group were bond traders. Fixed income trading revenue fell 9%, a smaller drop than at Goldman Sachs and J.P. Morgan and less than the 15% decline that analysts anticipated. They were the “winners,” if you will.
But while Goldman and JPM both saw similar drops in equities trading and ECM, they experienced gains in at least one area. Advisory revenue jumped 51% and 12% year-on-year at Goldman Sachs and J.P. Morgan while falling 29% at Morgan Stanley. At Citi, they were up 75%. Even M&A bankers at Bank of America, mired in a long slump, increased revenues by 10% compared to the first quarter of 2018. And while Goldman also saw a drop in DCM revenues, J.P. Morgan did not. It gained 21% year-on-year. Total investment banking fees at Morgan Stanley fell 24% compared to the first three months of 2018, by far the steepest decline among the five big U.S. firms. Bank of America was the only other firm where investment banking revenues fell (-8%).
The good news for Morgan Stanley is that, as a whole, it weathered the storm with solid wealth management margins and one-off investment gains. And its bond traders still did outperform rivals despite an overall drop in revenue. And while you hear optimistic assessments about a strong “pipeline” of potential deals in the making on almost every bank conference call, Chief Financial Officer Jonathan Pruzan said trading and dealmaking have started to rebound early in the second quarter. He told Bloomberg that M&A is “actually quite healthy” and that MS expects “another robust year” in advisory based on its pipeline for deals.
All that said, investment bankers and traders will be feeling the disappointing Q1 results in their wallet. Compensation expenses within Morgan Stanley's institutional securities group were down 16% for the quarter.
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