The Morgan Stanley chief warns that investment banking may not recover until next year

Morgan Stanley chief executive James Gorman has warned that investment banking revenue may not recover until next year after the Wall Street group’s net profit fell by almost a fifth in the first quarter.

A prolonged slowdown in investment banking activity has hit Morgan Stanley and its rivals as financial turmoil following the collapse of US regional lenders and Credit Suisse in Europe kept dealmakers on the sidelines.

Gorman told analysts on Wednesday that mergers and acquisitions as well as debt and equity underwriting activity “remains very subdued,”[ads1]; but argued that those revenues would return eventually.

“Already we’re seeing a growing M&A pipeline and some spring-like signs of new issuers emerging. That said, it remains largely a story about half of 2023 and all of 2024,” Gorman said during the bank’s first-quarter earnings call.

Growth in the wealth management division, which had been central to Gorman’s success in boosting its share price, failed in early 2023 to pick up the slack from the decline in its investment banking business.

Morgan Stanley shares were down about 0.6 percent in late morning trading in New York.

Billion dollar line chart showing investment banking revenue falling from a year ago

Net income attributable to shareholders was $2.98 billion in the first quarter, down 19 percent from the same period last year. Analysts had forecast quarterly net income of $2.92 billion, according to data compiled by Bloomberg.

Morgan Stanley’s investment banking revenue fell 24 percent to $1.2 billion, slightly ahead of analysts’ estimates of $1.1 billion and in line with similar declines at the other major Wall Street banks.

Income from interest rate trading, which in the past 12 months has benefited from the central banks’ aggressive rate hikes and market volatility surrounding the war in Ukraine, fell 12 percent to $2.6 billion.

This beat analysts’ estimates of $2.4 billion, but still trailed rivals JPMorgan, Citigroup and Bank of America where revenue was either flat or up. Goldman Sachs reported on Tuesday that interest income fell about 17 percent.

Line chart of interest income in billions of dollars showing that some Wall Street banks are benefiting from the fixed income trading boom more than others

The bank’s wealth management division earned $6.6 billion in revenue in the first quarter, an 11 percent gain from the same period last year and ahead of analysts’ expectations. The division also drew in $110 billion in net new assets during the quarter.

In recent years, Gorman has grown Morgan Stanley’s money management business with deals for ETrade and Eaton Vance, and he told analysts on Wednesday that “we will do more acquisitions”.

– There is no doubt about it. And that will be in the wealth and asset management space, and we are constantly keeping a list of who is attractive and who will be a good fit, he said, before adding that there was “nothing imminent”.

Morgan Stanley said deposits, which had been a major focus for investors after the collapse of Silicon Valley Bank in March, fell 3 percent to $340.9 billion, from $350.6 billion in the previous quarter. Many of Morgan Stanley’s deposits are from wealthier clients who tend to be less clingy and more likely to withdraw their money in search of a better interest rate.

Morgan Stanley’s chief financial officer Sharon Yeshaya told the Financial Times that the collapse of SVB triggered a movement out of deposits and into products such as money market funds and US Treasuries, but that many of these assets still remained with the bank.

Profits were hit by the bank quadrupling its provisions for potential credit losses to $234 million, up from $57 million a year ago, which it said was primarily related to commercial property and a worsening macroeconomic outlook.

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