Financial services behemoth Morgan Stanley (NYSE:MS) reported strong second quarter earnings with profits rising 47%, pushing Morgan Stanley stock higher.
The firm generated $15 billion in revenue, an 11% year-over-year increase, besting estimates by 5%. Net income surged 41% year-over-year to $3.1 billion, while earnings per share rose 47% to $1.82 per share. That crushed earnings estimates of $1.64 per share.
The stock price was rising on Tuesday, up modestly, about 1.3% as of mid-afternoon trading. Morgan Stanley stock has climbed 13% year-to-date.
There have been a couple of major reasons that Morgan Stanley earnings were outpacing other banks and financial services firms. Let’s examine why profits were up 47%.
Investment banking revenue up 51%
In comparison with JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C), amongst others, Morgan Stanley is usually an investment bank and wealth manager. It doesn’t have an enormous consumer banking arm, unlike the opposite three, so it doesn’t rely as much on interest income. As well as, it is just not as exposed to as much credit risk because the others, since it is just not a serious lender. Which means it only has to put aside a fraction of what the big banks do for provisions for credit losses.
As a substitute, its performance is rather more tied to investment banking and wealth management, more just like Goldman Sachs (NYSE: GS). Thus, it’s less diversified than a few of the rival financial services giants, without as much interest income. Nevertheless, on this current environment, when interest income and provision for credit losses have been a drag on earnings, Morgan Stanley has benefitted.
In has also seen an earnings boost from a resurgence in mergers and acquisitions and investment banking. For the previous two years, investment banking struggled under high rates of interest, as deals dried up. But that’s changing as Morgan Stanleyʻs investment banking revenue rose 51% within the second quarter, year-over-year, to $1.6 billion.
Further, the Institutional Securities business, which incorporates investment banking and equity and glued income trading, rose 25% to $7 billion within the quarter.
Morgan Stanley also got a lift from its wealth and investment management businesses. Morgan Stanley is a frontrunner in wealth management, which is its private banking, financial advisory, and brokerage arm. This business, which usually performs well when the markets are up, saw revenue climb about 2% within the quarter to $6.8 billion. Meanwhile, investment management revenue, which comes from fees from its funds and ETFs, rose 8% to $1.4 billion in Q2.
Lower rates will help
The massive jump in investment banking revenue is partly indicative of M&A and underwriting activity returning, but additionally it is a mirrored image of how far down it was in 2023, certainly one of the worst years in recent history for investment banking.
The first perpetrator has been high rates of interest, which makes the environment lower than ideal because it makes the associated fee of borrowing dearer and heightens the danger of defaults.
Nevertheless, with rates of interest expected to start out dropping once the Fed lowers the federal funds rate, investment banking deals should start to select up. As certainly one of the highest three investment banks, Morgan Stanley should see its revenue numbers increase.
It is usually certainly one of the leaders in wealth management, so the strength in two markets has allowed the corporate to navigate downturns well over time.
Beating the S&P 500
Over the past 10 years, Morgan Stanley stock has posted a median annualized return of 12.8%, beating the S&P 500.
The stock is comparatively low cost, with a P/E ratio of 15, and is well capitalized, with a standard equity tier 1 ratio of 15.2%. It also raised its dividend to 93 cents per share this quarter, up from 85 cents.
Morgan Stanley stock has been a solid performer over time, even through the lean times. And in an environment going forward that ought to provide some tailwinds, it looks like an honest option.