Morgan Stanley Stock Slumps on Earnings. Here’s Why.

Top line results came in above expectations with earnings per share of $1.38, above consensus forecasts for $1.31. Revenue of $13.3 billion slightly edged forecasts for $13.2 billion, according to analyst estimates compiled by FactSet.

“While the market environment remained mixed this quarter, the firm delivered solid results with an ROTCE of 13.5%,” Morgan Stanley CEO James Gorman said, referring to return on tangible common equity.

But the market appears to be taking a harsh view of Morgan’s investment banking business; revenue in that division was down 27% from the year-ago quarter to $938 million. Advisory fee revenues fell 35% to $449 million, driven by fewer completed M&A deals, the bank said.

The results look weak compared to Morgan’s crosstown rival,
Goldman Sachs
(GS), which reported flat investment-banking revenues of $1.55 billion, compared to a year earlier.

Gorman struck an upbeat tone on a call with analysts, saying “We are seeing increasing evidence of M&A and underwriting calendars that are building,” adding that he expects “most of the activity to materialize in 2024.”

Still, investors may have wanted evidence of a more imminent recovery in investment banking and the lack of detail didn’t inspire confidence.

Wealth management growth slips. Wealth management may be another sore spot for investors. The bank posted a 5% gain in revenue, driven by higher average asset levels. But the unit had only a $36 billion increase in net new assets, well below the rate of recent quarters. So far this year, the division has had $235 billion in net new assets.

“These numbers will bounce around and in any quarterly period, there are always idiosyncratic things,” Gorman said.

One headwind is the ongoing impact of high interest rates, prompting clients to keep cash in money market funds yielding above 5%. Morgan Stanley retail clients have 23% of assets in cash, 5% higher than historical averages, according to CFO Sharon Yeshaya.

The firm said it’s seeing signs that clients are investing some of that cash in equities and alternative investments, and it expects allocations to cash to fall as rates come down.

That could also take a while, though, since the Federal Reserve isn’t expected to start cutting rates until mid-2024.

Morgan Stanley does have a profitable business in its brokerage sweep accounts—paying out less in interest than it earns on deposits, generating net interest income. But brokerage sweep deposits fell to $143 billion from $228 billion for the same period last year.

That decline could weigh on net interest income, according to JMP Securities analyst Devin Ryan. “Given the tailwinds from NII over the past couple years…we will be listening closely for color on the trajectory from here,” Ryan wrote in an Oct. 18 note.

Declines in equity markets also put a dent in Morgan Stanley’s wealth management assets; the company reported $4.8 trillion in total client assets, up 16% year-over-year but down 2% sequentially. Other wealth management companies have reported similar sequential declines in client assets.

CEO succession. Beyond earnings, Morgan Stanley fielded questions about who will take over from Gorman, who has said he plans to give up the job. Contenders include Dan Simkowitz, head of investment management, and co-Presidents Ted Pick and Andy Saperstein, who run capital markets and wealth management.

Gorman made it clear the process was under way with specifying much else.

“We’re getting close. I’m certainly not a barrier to it,” he said. “I’d like to get on with it and I’ll help in the transition as executive chairman for a bit, and this place will go forth and thrive.”

Write to Carleton English at carleton.english@dowjones.com