NEW YORK: Morgan Stanley posted a record quarterly profit that blew past analysts' expectations as another of Wall Street's big investment banks gained from huge swings in financial markets due to the coronavirus crisis.
The bank wrapped up second-quarter results for the big US lenders that shook out along expected lines. Trading powerhouses Morgan Stanley and Goldman Sachs performed better than Main Street rivals JPMorgan Chase, Bank of America and Citigroup, which had to build massive reserves for loans that may go bust.
Morgan Stanley chief executive officer James Gorman, like other Wall Street executives this week, cautioned that the bank's record-setting trading numbers would be hard to repeat in the coming quarters.
"Clearly, it will be challenging for the back half of 2020 to meet the record first half results .... That said, many parts of our business should continue to perform well," said Gorman.
A hallmark of Gorman's tenure as CEO has been the bank's decade-long expansion into wealth and asset management, businesses that diversified the bank's revenue streams and provide balance against the unpredictability of its trading business.
Gorman said the decision to keep the bank's consumer loan business small also helped this quarter. Credit cards and small business loans are expected to be badly hit by the Covid-19 pandemic, and rival bank Goldman Sachs had to set aside US$1.6 billion for loans that could go bad.
In contrast, Morgan Stanley set aside just US$239 million.
The bank's stock was up over 3% at US$52.98 by mid-morning.
"Morgan Stanley's impressive second-quarter results strongly reflected its favorable business mix," said Donald Robertson, a senior vice president at Moody's Financial Institutions Group. "Its lack of traditional retail and commercial banking activities left it ... unscathed from the large loan-loss provisions."
The bank's trading unit recorded a 68% jump in revenue, led by a nearly 168% surge in bond trading. Equities trading revenue rose 23%.
Investment banking was another bright spot, with revenue jumping 39% as companies looked to shore up their financial position to ride out the effects of Covid-19 pandemic.
Overall revenue jumped 31% to a record US$13.41 billion in the quarter, clocking a rise in all its segments.
In the wealth management unit, where revenue rose 6% since last year, clients took advantage of both the markets and lower interest rates to borrow more. The unit generated about a third of the bank's revenue for the quarter.
Securities-based loans, or loans on the value of one's brokerage account, rose 17% year over year, while mortgages rose 12%.
The bank's earnings attributable to common shareholders rose 45% to US$3.2 billion, or US$1.96 per share. Analysts on average had expected a profit of US$1.12 per share, according to IBES data from Refinitiv.
Meanwhile, Bank of America Corp saw its profit more than halve in the second quarter as it set aside US$5 billion to cover potential loan losses, while warning that it would struggle as long as interest rates stayed low.
The Charlotte, North Carolina-based lender is especially vulnerable to rate movements because of the composition of its balance sheet and at least one analyst expressed concern about its net interest income, down 11%.
Shares in the bank fell about 4% in response to the results.
"When both long term and short term interest rates are at their historical lows as they are today. That spread is lower, and we make less money," chief financial officer Paul Donofrio said.
The fall in revenue and profit was broadly in line with other Main Street peers that have suffered from the need to brace for a deep recession, while profiting from the surge in financial market trading since February.
"Strong capital markets results provided an important counterbalance to the Covid-19-related impacts on our Consumer business," chief executive officer Brian Moynihan said.
The bank allocated a much lower dollar amount for reserves this quarter than some of its peers earlier in the week, in part due to it having set aside more in the previous quarter.
Its provision expense rose just 7% in the second quarter, compared with a 26% increase at JPMorgan Chase & Co, a 12% jump at Citigroup Inc and a 138% jump at Wells Fargo .
It also reported a 9% fall in pre-provision income, pointing to the pressure on its business model from the interest rate environment, even if it did not have to prepare for potential loan losses.
Donofrio, however, added that the bank was seeing early signs of "cautious optimism" in the economy, with loan applications showing signs of life.
Net income applicable to common shareholders fell to US$3.28 billion, or 37 cents per share, for the quarter to end of June, topping analysts' expectations of 26 cents per share.
Higher non-interest income, mainly in global markets and banking unit, drove the beat but was offset by lower net interest income (NII) and loan loss provisions, UBS analyst Saul Martinez said.
NII, a key measure of how much banks can make from their lending activities, has been pressured by the pandemic as the US Federal Reserve slashed interest rates to near-zero levels.
Net income for the bank's global markets unit rose 81% to US$1.9 billion but revenue gains of 50% in fixed income, currencies and commodities and 7% in equities trading failed to match those reported by some of its rivals.
Overall revenue, net of interest expense, fell 3% to US$22.3 billion, while consumer banking net income dropped to US$71 million from US$3.29 billion a year earlier, and that for global wealth and investment management by more than 40%. – Reuters
source https://www.thesundaily.my/business/morgan-stanley-posts-record-quarterly-profit-bank-of-america-earnings-more-than-halve-in-q2-BE2897663
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