Morgan Stanley Earnings: How profits increased by 47%

Morgan Stanley (NYSE:MS), a financial services giant, reported strong earnings in the second quarter with profits up 47%. This pushed Morgan Stanley stock higher.

The company generated $15 billion in revenues, an increase of 11% over the previous year. This exceeded estimates by 5%. Net income jumped 41% over the past year to $3.1 billion. Earnings per share grew 47% to $1.82. This was a huge surprise, as analysts had expected earnings per share to be $1.64.

The stock price rose modestly on Tuesday, by about 1.3% at mid-afternoon. Morgan Stanley’s stock has risen 13% so far this year.

Morgan Stanley’s earnings outpaced those of other banks and financial service firms for a number of reasons. Let’s look at why profits increased by 47%.

Investment Banking Revenue Up 51%

Morgan Stanley, compared to JPMorgan Chase(NYSE:JPM), Bank of America(NYSE:BAC), and Citigroup (NYSE :C), is primarily an investment bank and a wealth manager. Morgan Stanley does not have the same consumer banking division as the other three. It is therefore less dependent on interest income. It is also not as exposed as the other three to credit risk, as it isn’t a major lender. It only has to set aside fractions of what large banks do as provisions for credit losses.

Its performance is more closely tied to investment banking, wealth management and similar to Goldman Sachs. It is therefore less diversified and has lower interest income than some of its rival financial services giants. Morgan Stanley has benefited in the current environment when interest income and provisioning for credit losses are a drag on earnings.

In has also seen a boost in earnings from a resurgence of mergers and acquisitions, and investment banking. Investment banking suffered from high interest rates and a lack of deals in the two previous years. Morgan Stanley’s investment banking revenue grew 51% year-over-year to $1.6 billion in the second quarter.

The Institutional Securities business, including investment banking, equity and fixed income trading and other financial services, grew 25% to $7 billion during the quarter.

Morgan Stanley’s wealth and investment management businesses also saw a boost. Morgan Stanley’s wealth management division, which includes its private banking, financial advice, and brokerage arms, is a leader. This business, which usually performs well in a rising market, saw its revenue rise about 2% to $6.8 Billion. Investment management revenue, which is derived from fees charged by its funds and ETFs rose 8% in Q2.

Lower rates can help

The huge jump in investment bank revenue is partly due to the return of M&A activity and underwriting, but also reflects how low it was in 2023 – one of the worst investment banking years in recent memory.

High interest rates are the primary culprit, as they make borrowing more expensive and increase the risk of default.

Investment banking deals will start to increase as interest rates begin to fall once the Fed lowers its federal funds rate. Morgan Stanley, as one of the three largest investment banks in the world, should see its revenue numbers rise.

The company has been able to weather downturns over the years because it is a leader in both markets.

Beating S&P 500

Morgan Stanley’s stock has outperformed the S&P 500 by an average annualized 12.8% over the last decade.

The stock is cheap with a P/E of 15 and well capitalized with a common equity Tier 1 ratio of 15.2%. It also increased its dividend from 85 cents to 93 cents this quarter.

Morgan Stanley has performed well over the years despite the tough times. In a future environment that should provide some tailwinds it looks like an attractive option.

This site is intended for entertainment only and does NOT offer financial advice.

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