Morgan Stanley outperformed rival Goldman Sachs in M&A advisory and its traders fared better than expectations, helping the investment banking powerhouse beat first-quarter profit estimates by a wide margin.
The bank’s dealmakers nearly doubled advisory revenue even as Russia’s invasion of Ukraine unsettled equity markets and forced companies to hold off on dealmaking and stock market listings.
The war in Ukraine, which Russia calls a “special military operation”, and the prospect of multiple interest rate hikes by the Federal Reserve, however, boosted volatility in markets, helping the bank clock in a smaller-than-expected 6 percent fall in trading revenue.
Chief Executive Officer James Gorman said inflationary pressures, tightening of monetary policy, and the invasion of Ukraine “injected significant uncertainty into the markets.”
Like other Wall Street banks, Morgan Stanley’s underwriting business also took a hit, with revenue at its equity underwriting business falling nearly 83 percent percent from a year ago when it generated handsome fees from a spate of high-profile IPOs.
According to Refinitiv data, equity underwriting deal volumes fell 80 percent in the first quarter for Morgan Stanley and Goldman Sachs, the two most dominant financial advisers on initial public offerings (IPOs) globally.
“Results from Morgan Stanley were pretty good, in my opinion, reflecting considerable resiliency given the geopolitical events and substantial volatility in equity, fixed income and commodities markets,” said James P. Shanahan, senior equity research analyst, North American financials, at Edward Jones.
Morgan Stanley also reported a steep decline in fixed income underwriting revenue, hurt by lower bond issuances.
Return on tangible equity, a closely-watched metric for profitability that measures how well a bank is using its capital to produce profit, was 19.8 percent during the quarter. The figure was well above the bank’s two-year target of between 14 percent and 16 percent.
Morgan Stanley’s dealmakers brought in $944 million in advisory revenues in the quarter, compared with $480 million a year ago, helped by the completion of deals that were initiated last year.
By contrast, Goldman Sachs’ revenue from advising on deal remained largely unchanged at $1.13 billion in the first quarter.
Morgan Stanley’s Chief Financial Officer Sharon Yeshaya said investment banking pipelines remained healthy, but cautioned that macro economic uncertainties could delay deal closings.
Overall investment banking revenue slumped 38 percent to $1.76 billion. The unit consists of the bank’s advisory, equity underwriting, and fixed income underwriting businesses.
Morgan Stanley’s profit fell 11 percent to $3.54 billion, or $2.02 per share, in the quarter ended March 31. Analysts, on average, were expecting a profit of $1.68 per share, according to Refinitiv data.
Total expenses fell to $4.83 billion from $5.3 billion a year earlier.
Net revenue fell 6 percent in the quarter to $14.8 billion, but beat estimates of $14.27 billion.
By Noor Zainab Hussain and Matt Scuffham