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Summary
- Morgan Stanley recorded $13.4 billion in net revenues in 2Q 2020 with a net income of $3.2 billion. Its RoE was 15.7% and ROTCE was 17.8%. Strong market activity and performance of the Institutional Securities business helped the firm to beat street estimates.
- The firm has announced a quarterly dividend of $0.35. Loss provisions also increased after considering economic conditions and expected implication on portfolios.
- Acquisition of E*TRADE would allow the firm to increase its technological capabilities and full suite of services to clients in one place. Integration of clients and services would be crucial for both businesses.
Morgan Stanley has surprised markets in earnings calls for the second quarter of 2020. Other big U.S. banks with commercial banking segment have reported higher loan loss reserves, consistently with the deterioration of economic outlook.
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Net revenues of Morgan Stanley for the reported period stood at $13.4 billion, compared with $10.2 billion a year ago, representing an increase of more than 30%, driven by almost $8 billion in net revenues from Institutional Securities. Income before taxes for the quarter increased by 50% to $4.35 billion from $2.9 billion in the same period last year.
Net income attributable to the firm was $3.2 billion or $1.96 per diluted share for the second quarter ended 30 June 2020, up approximately 45% from $2.2 billion or $1.23 per diluted share in the same period last year. Its return on equity was 15.7% and return on average tangible common shareholders' equity (ROTCE) was 17.8%.
Institutional Securities
Institutional Securities generated pre-tax income of $3 billion against $1.5 billion in the same period last year. Investment banking revenues increased for the second quarter, driven by equity and fixed income underwriting, but advisory revenues were lower due to subdued activity.
Equity underwriting serviced higher volumes of block trades and convertibles, while fixed income underwriting was driven by higher volumes of high-grade bonds and non-investment grade bonds, as businesses continue to embrace lower interest rates.
Net revenues from sales and trading increased by 68% to $5.5 billion compared to $3.3 billion. Client activity across all regions increased, helping to deliver strong performance in cash equities and derivatives segment.
Market volatility also impacted fixed income trading revenues of the segment with higher client activity, strong market activity, and movements in credit spreads.
Wealth Management
Wealth Management recorded net revenues of $4.7 billion during the quarter compared to $4.4 billion in the same period last year. Asset management revenues were flat compared to last year, primarily due to lower average fee rates and lower markets.
Net interest income of the segment was also unchanged compared to last year, while transactional revenues were lower when excluding market-to-market gains on investments.
Investment Management
This segment reported revenues of $886 million, slightly up from $839 million last year. Investment management delivered pre-tax income of $216 million in the second quarter. A 12% increase compared to 2Q 2019 in asset management revenue was underpinned by strong performance and inflows.
Investment revenues decreased slightly due to lower carried interest from Real Estate and Infrastructure funds. Investment management also acquired long term net flows of $15.4 billion with assets under management of $665 billion.
Capital Position and Dividend
At the end of the quarter, the firm’s CET1 capital ratio was 16.1%, and Tier 1 capital ratio was 18.1%. The Board declared a quarterly dividend of $0.35 per share. Morgan Stanley incurred $239 million in provisions for credit losses on loans and lending commitments, after making $407 million provisions in the previous quarter.
Morgan Stanley held $1.2 billion as allowances for credit losses and lending commitments at the end of June 2020. It reported that balance sheet, liquidity and capital remain resilient.
Acquisition of E*TRADE
In February 2020, the firm announced the acquisition of E*TRADE for ~$13 billion. Subject to applicable conditions, it seeks to complete the transaction in 4Q 2020. Acquisition of the broking platform is expected to deliver more than $400 million in cost synergies, but it would incur restructuring costs of approximately $800 million over three years.
As a capital light business model, Morgan Stanley seeks to improve its mix towards balance sheet light sources with stable revenue streams. This transaction fills the products and services gaps for the clients of both businesses.
E*TRADE transaction allows the firm to create a strong player in wealth management, positioning to become a leader in the wealth management industry. It had over $360 billion in retail client assets and 5.2 million client accounts that would be added to the firm’s more than 3 million clients and $2.7 trillion in client assets.
Morgan Stanley would benefit from the experience of E*TRADE in technology, innovation and products. Mike Pizzi, CEO of E*TRADE would join Morgan Stanley and lead the business as well as integration with the firm.
E*TRADE is a brand when it comes to digital brokerage, inventing this category around 40 years ago, and has consistently delivered high-quality service to its clients over brief period economic cycles.
The transaction would also add low-cost deposits for Morgan Stanley, providing funding benefits to the firm. Moreover, it follows a decade long commitment of the firm to generate more revenues from balance sheet light segments.
Morgan Stanley also anticipated that the combined wealth and investment management business would constitute around 57% of the firm’s pre-tax profits. The acquisition would be accretive after the estimated cost and funding synergies are realised.
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(Note: All currency in USD unless specified otherwise)
