Strong All-Around Performance Makes Q1 The Best Post-Recession Quarter For Morgan Stanley

Morgan Stanley (NYSE:MS) comfortably surpassed investor expectations from its performance figures for the first quarter of the year on Monday, April 20, as the global investment bank churned out strong profits across its operating divisions. ^[1] While the top line received a boost from the surge in trading activity, the wealth management operations continued to report a steady improvement in profits. Notably, the $2.3 billion in equity trading revenues reported by Morgan Stanley for Q1 2015 are the highest for the bank since the economic downturn of 2008. While the bank reported debt trading revenues in excess of $2 billion for the first time in more than three years, its wealth management division also reported its highest-ever revenue figure. With operating expenses increasing nominally compared to revenues, Morgan Stanley reported its best quarterly profit figure in seven years.

The results for Q1 2015 show that Morgan Stanley has successfully revamped its business model over recent years to be able to leverage any uptick in global trading activity, even as the wealth management division anchors the results and insulates earnings from the volatile nature of its trading arm.

We have increased our price estimate for Morgan Stanley’s stock upwards from $38 to $40, which is about 10% above the current market price.

See our full analysis of Morgan Stanley

Investment Banking Operations Churn Best Numbers Since 2011

Unlike its other major competitors in the U.S., Morgan Stanley’s new business model relies more on equity trading operations than fixed-income operations to generate value, due to a conscious decision by the bank to scale down the latter. This fact is evident from the chart above, which shows that equities trading accounts for about 28% of the investment bank’s total share value compared to the figure of less than 13% for FICC (fixed-income, currencies and commodities) trading.

Since early 2013, Morgan Stanley’s equities trading desk has established itself as the undisputed leader in the global equities trading industry – garnering more revenues from these operations than any other bank worldwide in five of the last seven quarters (except for Q4 2013 and Q4 2014). The bank’s total trading revenues for Q1 2015 were $4.2 billion (adjusted for debt revaluation gains), with the equities trading desk making $2.3 billion and the fixed-income desk making just over $1.9 billion. The total trading revenues are 24% higher than the figure for the year-ago period, and a good 140% higher than that for the previous quarter. While investment banks normally report a peak in trading revenues for the first quarter, Morgan Stanley benefited from the surge in debt as well as currency trading activity this time around, thanks to the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc.

More importantly, Morgan Stanley’s investment banking operations saw a pre-tax operating margin of 33% for the quarter – making it one of the best quarters for the bank in this regard since the economic downturn of 2008.

Wealth Management Continues To Outdo Itself

Over the recent years, Morgan Stanley has relied heavily on its wealth management operations to provide a stable source of income in what was once seen as an extremely volatile trading-driven business model. Having achieved the self-imposed 17%-margin target for the business well before the 2014 deadline in Q4 2012, Morgan Stanley has pushed the envelope each quarter since then, and set itself a new target of 25% to be achieved by the end of 2015. ^[2]

This target seems within reach, as the division reported a record margin figure of 22% in Q1 2015 despite the higher compensation costs associated with the first quarter of a year. A steady inflow of client assets into the division coupled with high interest-based revenues helped total revenues reach the record high figure of $3.83 billion. At the same time, a reduction in the number of wealth advisors to below 16,000 also made this quarter the best ever for the division in terms of two key metrics that Morgan Stanley reports: average annualized revenue per representative and total client assets per representative.

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1. 1Q2015 Earnings Release, Morgan Stanley Press Releases, Apr 20 2015 [↩]
2. Q4 Strategic Update, Morgan Stanley Press Releases, Jan 20 2015 [↩]