JPM - Morgan Stanley: Last Of Big Banks To Report Third Of Big Banks In Performance

2023-04-19 12:26:18 ET

Summary

• Morgan Stanley did not perform in the first quarter of 2023 as well as it did one year ago, but it still turned in a 12.4 percent return on equity.
• The business model that James Gorman, chief executive officer of Morgan Stanley, created for the bank has done very, very well for the bank.
• And, Morgan Stanley seems to be in a very good place to continue to raise its performance going forward.
• Overall, the biggest six banks in the United States had a very good first quarter of the year, despite the condition of the U.S. economy and the world economy.
• In fact, to claim this position for the biggest banks more than one year after the Federal Reserve began its fight against inflation is quite remarkable.

Morgan Stanley (MS) today reported net revenues of $14.5 billion for the first quarter that ended March 31, 2023, compared with $14.8 billion a year ago.

Net income applicable to Morgan Stanley was $3.0 billion, or $1.70 per diluted share, compared with net income of $3.7 billion, or $2.02 per diluted share , for the same period a year ago.

Overall, Morgan Stanley produced a return on equity of 12.4 percent for the first quarter of 2023, down from 14.7 percent in the first quarter of 2022.

The bank earned a return on tangible common equity of 16.9 percent, down from 19.8 percent one year earlier.

Not bad in such a mixed-up economy.

The scoreboard for the "Big Banks."

JPMorgan Chase & Co. ( JPM ) 18.0 percent

Bank of America Corporation ( BAC ) 12.5 percent

Morgan Stanley ( MS ) 12.4 percent

Wells Fargo & Company ( WFC ) 11.7 percent

Goldman Sachs Group, Inc. ( GS ) 11.6 percent

Citigroup, Inc. ( C ) 9.5 percent

Not bad, overall.

As mentioned in yesterday's report about Goldman Sachs , I mentioned that GS has been going through a restructuring of its business model much as Morgan Stanley had earlier moved to a model producing much less volatile results.

Well, here we find attention given to James Gorman, CEO of Morgan Stanley, citing the changes to the business model of Morgan Stanley in maintaining the company's performance:

"The bank's wealth management division, which has been central to chief executive James Gorman's success in boosting Morgan Stanley's stock price, made $6.6 billion in revenue in the first quarter, a gain of 11 percent from the same period last year and ahead of analysts' expectations."

This analysis in the Financial Times , also goes on:

"The division also pulled in $110 billion in net new assets during the quarter."

But, on the other side,

"Profits were hit by the bank quadrupling provisions for potential credit losses to $234 million, up from $57 million a year ago...."

These charges were primarily related to commercial real estate and "deterioration in the macroeconomic outlook."

Also, the investment banking side of the business did not do that well.

Mr. Gorman seemed pleased, given the condition of the world, as he claimed that Morgan Stanley had "delivered strong results" in "a very unusual environment."

I agree.

Mr. Gorman, in my mind, has done a terrific job at Morgan Stanley and continues to do a terrific job.

The Big Banks

More and more, I think we are seeing a division in the banking industry, a lot of it created by the Federal Reserve System.

The Big Banks have had, as I have written, lots and lots of money "hanging around." Cash is quite abundant on their balance sheets.

Consequently, they have not had to bid for deposits, the deposits just came to them.

As a consequence, the net interest margin of the biggest banks improved substantially during the past year or so as the Federal Reserve started pushing interest rates up to combat inflation.

And, as loan demand picked up and loan rates began to rise, the biggest banks could follow the market in terms of loan rates but had to do little or nothing to maintain the deposits that supported the lending.

Net interest margins rose for the bigger banks, something the regional and/or smaller banks were not able to achieve.

Furthermore, the asset management divisions of the bigger banks also prospered in terms of drawing in funds, as investors reallocated their portfolios more and more to funds that could produce higher returns than they could get "on deposit."

Note the inflow of money that Morgan Stanley received in the first quarter of 2023.

And, finally, it is hard to picture the returns that these six banks are earning!

Especially, given that the Federal Reserve has been fighting inflation for more than a year now.

The biggest banks are well-capitalized.

The biggest banks have very, very liquid balance sheets.

The net interest margins at the biggest banks are large.

The only thing that seems to be threatening is that they have bond portfolios that are underwater. But, they seem to be in no real need to have to sell them. (As Silicon Valley Bank showed us, this is not the case for some of the regional banks or some of the smaller banks."

However, there is one final comment I would like to make on this situation.

With the biggest banks in such good condition, the Federal Reserve is faced with a very difficult problem in its program to fight inflation. The situation causes one to ask a question about how "tight" is the Federal Reserve going to have to get in order to bring inflation down to its target level of 2.0 per cent?

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