Morgan Stanley’s earnings are outpacing estimates of wealth and rising stocks

July 18 (Reuters) – Morgan Stanley’s profit beat estimates as growth in the wealth management business offset lower trading revenue in the second quarter and executives expressed optimism about the economic environment.

Shares of Morgan Stanley (MS.N) rose more than 6%, shrugging off a 14% drop in earnings. Excluding one-time items, Morgan Stanley earned $1.24 per share on revenue of $13.46 billion, comfortably beating estimates of $1.15 per share on revenue of $13.08 billion, according to data from Refinitiv IBES.

“We ended the quarter overall in a better place, on a better note,” CEO James Gorman said, after starting the period with uncertainty about the banking crisis, geopolitical tension and the path of US interest rates. “While we may not be at the end of interest rate increases, I think we are very close to them,” he told analysts on the conference call.

The wealth management unit’s net revenue increased 16% to a record $6.7 billion for the quarter, and it acquired nearly $90 billion in new assets.

These results helped mitigate the decline in trading returns as volatility subsided. Fixed income revenue fell 31%, while equities fell 14%. Morgan Stanley’s profits have also been eroded by $300m in severance costs after the bank laid off thousands of employees this year.

Revenue from investment banking stood at $1.16 billion. “The results look much better than feared in a challenging environment,” UBS analyst Brennan Hawken wrote in a note.

Investment banking services

While quieter markets have affected trading, stable market conditions have not yet spurred activity in the capital markets, Chief Financial Officer Sharon Yeshaya said in a phone interview.

“However, we expect investment banks to lead the recovery in the next quarter,” she said in an interview with Reuters. She later told analysts on a conference call that mergers and acquisitions are picking up in some industries such as finance and energy, and the bank’s deal backlog is increasing. Investment banking revenues were flat compared to the previous year.

James Shanahan, an analyst at Edward Jones, said Morgan Stanley stock was reacting well to an improved outlook for the rest of the year.

Succession

Gorman announced in May that he would be stepping down in a year. A person familiar with the situation told Reuters last month that the Morgan Stanley board would focus on selecting Gorman’s successor at its summer and fall meetings.

The big three candidates include Ted Beck, the company’s co-chairman who leads its investment and commercial banking arm, and co-chairman Andy Saperstein, who runs Wealth Management.

Although business unit results have been mixed, Gorman emphasized that their performance is not the only consideration for CEO selection.

Revenue Investment Management, which is run by the third CEO nominee, Dan Simkowitz, fell 2%.

Additional reporting by Tatiana Bautzer in New York and Mehnaz Yasmin and Nikit Nishant in Bengaluru; Editing by Lanan Nguyen, Arun Kuyor, Louise Heavens, and Nick Zieminski

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