Morgan Stanley whiffed on earnings expectations on Thursday, driven mainly by the bank’s underperforming trading unit typically known as one of the industry’s best. The “challenging” fourth quarter, as described by CEO James Gorman, resulted in a substantially smaller compensation pool in Q4 for investment bankers and traders who were otherwise having a banner year.
Fixed income trading revenues for the fourth quarter were down 30% year-on-year while equities trading revenues were flat. Rivals like Goldman Sachs and J.P. Morgan also saw their bond trading revenues fall, but not nearly at the same rate, and the four other big U.S. banks all posted double-digit increases in equities trading revenue.
As a whole, Morgan Stanley’s institutional securities group, which houses its trading and investment banking teams, saw its net revenues fall by 15% year-on-year. Yet compensation and benefits costs cratered by 24% in the fourth quarter, right ahead of bonus season. Traders at Morgan Stanley, particularly those in fixed income, are likely to take the brunt of the punishment. Making matters worse, compensation as a percentage of net revenues within the institutional securities group fell from 34% to 31% year-on-year during Q4.
However, the division still performed better over the course of the year than it did in 2017. The compensation pool for all of 2018 increased by 5%. Bloomberg reported in late December that Morgan Stanley would increase bonuses for traders and dealmakers if they finished the year with a low-to-mid single digit gain. Despite the rough fourth quarter, they still accomplished that. But bonuses likely would have been much bigger had Q4 not gone the way that it did.
Meanwhile, Gorman said on the earnings call that the bank has reduced the vesting period for its junior staff to be more in line with the street, implying that some people at the firm will receive more of their bonuses in cash.
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