
Can Morgan Stanley Keep Up Post-Brexit Bond-Trading Growth?
This article, originally published at 7:30 a.m. on Wednesday, July 20, 2016, has been updated with comments from analysts and executives.
Morgan Stanley (MS) - Get Report posted higher revenue in the three months through June than Wall Street expected as major businesses from investment banking to bond-trading rallied after upheaval at the beginning of the year.
Profit of 75 cents a share compared with the 60-cent average of estimates from analysts in a Bloomberg survey, as net income slid 14% from a year earlier to $1.43 billion. Revenue of $8.91 billion topped projections of $8.31 billion, Morgan Stanley said in a statement.
The New York bank's earnings showed strength in bond-trading, where revenue of $1.3 billion was consistent with last year, even after the sale of its oil business at the end of 2015. Excluding the effect of an accounting change, the unit would have shown growth of 2.4%.
Fixed-income trading climbed 35%, meanwhile, at JPMorgan Chase (JPM) - Get Report, 26% at Bank of America (BAC) - Get Report , 20% at Goldman Sachs (GS) - Get Report and 14% at Citigroup (C) - Get Report . While the firms' investment banking divisions, which include stock and bond underwriting as well as deal advisory services, fared better than during the first quarter's market slide, they all saw revenue decline from a year earlier.
Citigroup is a holding in Jim Cramer's Action Alerts PLUS charitable trust portfolio. Want to be alerted before he buys or sells C? Learn more now.
"Our results this quarter reflect solid performance in an improved but obviously still relatively fragile environment," Morgan Stanley CEO James Gorman said in the statement. "Despite the overall lack of conviction in the market, we executed on our strategic plan and performed well in the areas of traditional strength."
Gorman said in June that the company was targeting $1 billion per quarter in bond trading, Oppenheimer analyst Chris Kotowski said in a note to clients.
"At the time it almost sounded like an aspirational goal, but clearly they did well better," Kotowski said, and with six-month revenue of $2.2 billion from the unit, the business may be drawing close to sustainable annual performance.
"That would be a significant positive after years of grinding lower industrywide," Kotowski said, "but of course, one needs more than one quarter to draw that conclusion firmly."
In fact, it's difficult to determine how much of the fixed-income growth was spread throughout the month and how much was generated by market gyrations in the wake of Great Britain's decision to leave the European Union in late June, Brian Kleinhanzl, an analyst with Keefe Bruyette & Woods, said in a telephone interview.
"A lot of the end-of-June revenues weren't really reoccurring," he said. "That activity should trail off as you get further into the third quarter."
Overall revenue in institutional securities, which includes both trading and investment banking and is the company's biggest division, dropped from a year earlier as stock- and bond-underwriting slid 40% to $611 million.
CEOs have been shying away this year from capital markets roiled by slowing Chinese growth, oil prices that remain less than half of their 2014 peak above $100 a barrel and the so-called Brexit vote.
Indeed, all of Morgan Stanley's major competitors saw declines in underwriting of stock offerings, though the bank and distant cousin JPMorgan Chase were the only ones that saw declines in bond underwriting. Morgan Stanley was founded in the 1930s as a spinoff of then J.P. Morgan & Co's securities business after the Glass-Steagall Act mandated separation between commercial and investment banking.
The bank climbed 2.9% to $29 on Wednesday, before the start of regular trading in New York. Its shares previously fell 18% this year, a worse drop than either the blue-chip S&P 500 or the S&P 500 Financials Index.
Morgan Stanley's bottom line benefited from steps toward a goal outlined in January of cutting as much as $1 billion in expenses through 2017, executives noted. The bank has closed two of the four data centers it plans to shutter, CFO Jonathan Pruzan said on the call, and cut nonessential travel costs by 50% during the first half of 2016.
While Morgan Stanley has added 250 employees, it has also reduced staffing in higher-cost metropolitan areas, he said.
The measures are part of what the bank dubbed Project Streamline, an initiative that includes boosting return on equity to 11% by the end of next year. The return, a gauge of how well companies use shareholders' money, climbed to 8.3% in the three months through June from what Gorman called a "not acceptable" 6% in the first quarter.
"It feels good in this environment," he noted, though the return was curbed by a higher-than-usual tax rate
Morgan Stanley won conditional approval last month from the Federal Reserve to increase its dividend 33% to 20 cents a share and raise its stock buybacks through the end of next June to $3.5 billion, a boost of 40%.
The bank must resubmit its capital-spending plan to regulators before the end of 2016, however, to show that weaknesses in the way it estimates risks and sets capital-return levels have been fixed. Otherwise, the regulator could block further dividends or share buybacks from the New York-based firm.
"We clearly have started to work and will dedicate the resources that we need to make sure we are successful in our resubmission," Pruzan said.









