Morgan Stanley shares fall despite earnings beat, as investment banking revenue shrinks
Stock markets swung sharply during the quarter after U.S. President Donald Trump announced sweeping tariffs against major economies. This spurred volatility and trading volume, as investors repositioned their portfolios and hedged risks. But markets recovered late in the quarter and improved the outlook for business.
Morgan Stanley shares opened down 3%, but accelerated the decline to almost 4% after a report about Trump potentially taking action to fire Fed chairman Jerome Powell.
"The second quarter unfolded with two distinct halves. The first half began with uncertainty and market volatility associated with the U.S. trade policy, and the second half ended with increasing engagement and a steady rebound in capital markets," CEO Ted Pick told analysts on a conference call.
Traders brought in a big windfall and institutional securities, which houses Morgan Stanley's Wall Street operations, posted revenue of $7.6 billion, compared with $7 billion a year ago.
Investment banking at Morgan Stanley did not recover as quickly as it did for rivals such as Goldman Sachs, Citigroup and JPMorgan Chase. The other lenders also reported trading windfalls in the second quarter.
Morgan Stanley's revenue fell 5%, and fewer completed M&A transactions weighed on its advisory revenue. But executives were more optimistic about the outlook for M&A and IPOs.
"We are optimistic about the capital markets rebound," Chief Financial Officer Sharon Yeshaya told Reuters in an interview. "Companies are looking past tariffs for strategic movements and growth," she said, adding that discussions about mergers and divestitures are active again.
Morgan Stanley's equity underwriting surged 42% to $500 million, driven by higher follow-on and convertible deals as well as IPOs. It was the lead underwriter of fintech giant Chime's June IPO and also led IPOs for Hinge Health, and marketing tech firm MNTN in May. Other prominent deals in the quarter were financing for Elon Musk's xAI and advisory on the sale of Silvus Technologies to Motorola.
Overall, the bank beat forecasts with a net income of $3.5 billion, or $2.13 per share in the quarter, above the estimates compiled by LSEG of an average $1.96 per share.
After reducing headcount by 2,000 employees in the first quarter, Morgan Stanley is not discussing more job cuts.
CLIENT ASSETS REACH $8 TRILLION
Total client assets across wealth and investment management reached $8.2 trillion, approaching a longstanding goal of $10 trillion in assets managed set by former CEO James Gorman.
Attracting net new assets is critical for wealth and investment management, as it drives fee-based revenue and supports long-term growth in assets under management.
Wealth management revenue increased to $7.8 billion in the second quarter from $6.8 billion a year earlier, by adding new assets and collecting more fees.
M&A FOCUS
Analysts quizzed the CEO about possible acquisitions that Morgan Stanley could do, particularly as a potential reduction in capital requirements frees up money to pursue deals.
"There are inorganic opportunities that come by along the transom and we are looking at them, of course, but the bar is super high," Pick said.
Deals could involve "tuck-ins," or acquisitions of small companies that add to the bank's core strategy.
Pick took the helm in January 2024 succeeding Gorman, who bought brokerage E-Trade and asset manager Eaton Vance, transforming Morgan Stanley's business model and turning profits more predictably.
The bank also said it is considering potential uses of stablecoins for its clients, but it was too early to tell how the business would take shape, Yeshaya told analysts. (Reporting by Manya Saini in Bengaluru and Tatiana Bautzer in New York; Editing by Lananh Nguyen, Sriraj Kalluvila, Mark Porter and Daniel Wallis)
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