Fitch: Morgan Stanley's 1Q'16 Earnings Weighed Down by Market Volatility
OREANDA-NEWS. Morgan Stanley's (MS) first quarter 2016 (1Q'16) earnings were impacted by challenging market conditions and muted client activity levels, according to Fitch Ratings. The company's overall annualized return on equity was 6.2% in 1Q'16, which is largely reflective of the difficult operating environment.
This quarter's results generally are generally in line with peer banks that have reported thus far. JP Morgan (JPM) posted more favorable results given its diverse set of businesses, Citigroup (C) reported similar results, and Bank of American (BAC) reported less favorable results amid higher energy related provisioning and weak trading.
MS' revenue pressures primarily occurred within the company's trading and underwriting businesses. Wealth management results remained relatively stable, while investment management results were down.
Operating performance in MS' Fixed Income, Currencies, and Commodities (FICC) business segment remained challenged, though this was offset by comparatively stable results from Equities trading, which continues to be a strong business for MS.
To the extent that market conditions improve, Fitch would expect returns from FICC to modestly improve, though they may continue to remain below the returns for the company's less capital intensive businesses.
MS' investment banking results reflected weaker debt and equity underwriting results amid challenging markets, partially offset by continued strength in advisory net revenues.
Key drivers of the reduction in debt underwriting net revenue were lower leverage finance activity and the reduction in equity underwriting net revenue due to a continued slow initial public offering (IPO) market. MS reported a strong M&A backlog, which could support advisory net revenue over the balance of the year, subject to market conditions.
While this quarter's results were challenging, they also served to highlight the benefits from the evolution of MS' business model towards wealth management.
Wealth management results were comparatively stable in 1Q'16 with net revenues down 2% from the sequential quarter and 4% from the year-ago quarter. Additionally, due to continued expense management efforts, the segment's pre-tax operating margin was 21% in 1Q'16, up from 20% in the sequential quarter but down from 22% in the year-ago quarter.
Fitch views the contribution from wealth management results favorably as it adds proportionately higher return and relatively stable earnings to MS' overall company profile.
Investment management results were down due in large part to lower investment realizations. The core asset management business actually experience incrementally higher fees in 1Q'16 relative to both the sequential and year-ago quarters.
MS continues to focus on expense management initiatives, with total expenses down 4% from the sequential quarter and 14% from the year-ago quarter, reflecting lower compensation expenses relative to the year-ago quarter. Should the revenue environment remain challenging over the balance of the year, Fitch would expect MS to engage in more significant expense management initiatives.
The company's strong capital and liquidity positions continue to support its ratings in Fitch's opinion. MS' fully phased-in Basel III Common Equity Tier 1 (CET1) ratio improved to 14.5% in 1Q'16, up from 14% in the sequential quarter and 11.6% in the year-ago quarter as the company continues to reduce high density risk weighted assets, primarily from the FICC business.
Additionally, MS' 1Q'16 Enhanced Supplementary Leverage Ratio improved to 6%.
Depending on how MS fares in the upcoming annual CCAR stress tests, it may seek to return more capital to shareholders via buybacks or dividends in the coming months.
Liquidity was similarly strong with the company's Global Liquidity Reserve (GLR) improved to $211 billion and its deposit balances grew to $158 billion both as of the end of 1Q'16.