Morgan Stanley profit down with lower investment banking revenue; shares tank

By Niket Nishant, Tatiana Bautzer and Manya Saini

(Reuters) - Morgan Stanley's third-quarter profit showed a hit from lethargic dealmaking, while shares sank 7.4% as some analysts pointed to a fall in net new assets in its wealth division and disappointment over the lack of news on succession.

The bank saw a sharp drop in investment banking revenues and sluggish trading as dealflow took a hit when geopolitical risk rose following the war in Ukraine and the Federal Reserve aggressively raised interest rates.

Analysts at Goldman Sachs said they expected a negative market reaction as the inflow of assets to wealth management fell, and conversion to higher fees over the assets was slow.

Net new assets in wealth management shrank to $35.7 billion from $64.8 billion a year earlier.

Meanwhile, analysts at Evercore criticized the lack of an announcement on a long-anticipated CEO succession, which they said "is a mistake by the Board as more time can only increase angst and divide parties."

CEO James Gorman, who has run the Wall Street giant since 2010, announced in May that he would step down within a year.

Shares fell 7.4% to a one-year low, despite the bank beating estimates.

The bank's profit dropped about 9% to $2.4 billion, or $1.38 per diluted share, for the three months ended Sept. 30, a smaller drop than analysts had expected. Analysts had forecast $1.28 per share, according to LSEG IBES data.

Gorman said the bank "is in excellent shape, notwithstanding the geopolitical and market turmoil that we find ourselves in," and added an announcement of his chosen successor is getting close.

"I don't want to give you an exact time because that's sort of a spoiler ... but we're well into it," he told analysts on Wednesday.

The strongest candidates are co-presidents Ted Pick and Andy Saperstein, respectively heads of institutional securities and wealth management, while Dan Simkowitz, head of asset management, is also being considered, Reuters has reported, citing a source.

INVESTMENT BANKING

Revenue from investment banking, led by Ted Pick, fell 27% to $938 million, as global mergers and acquisitions activity showed few signs of improvement due to rising interest rates, antitrust scrutiny and an uncertain economic and geopolitical outlook.

Gorman said although he saw recent improvement, he expected a sustained pick up only next year. While we expect momentum to continue this year, given the fourth quarter has some seasonal considerations, we expect most of the activity to materialize in 2024", he said.

Morgan Stanley CFO Sharon Yeshaya added that the most active industries are expected to be finance, energy, technology and artificial intelligence.

Morgan Stanley's revenue in fixed income underwriting fell even as rivals had higher revenues with stronger market activity. Yeshaya said Morgan Stanley cannot be compared to rivals due to different considerations of capital allocation and not only fees.

Trading, under Pick, was also muted, with a 2% rise in equity trading and 11% drop in fixed income. Gorman and Yeshaya told analysts clients were beginning to reduce cash positions and put money into markets.

Gorman said he expects trading to start picking up once interest rates begin to come down. The CEO has repeatedly said the results of each unit will not be a factor in choosing the next CEO.

CRE WEAKNESS

Morgan Stanley also set aside $134 million in provisions for credit losses, surging from $35 million in the same quarter last year, driven by worsening conditions in commercial real estate (CRE). Part of the growth was a provision to cover losses with one specific loan that was not disclosed. Yeshaya said the bank has been "proactive" in the provisioning and that its exposure is smaller than 5% of the credit portfolio.

The results round out a largely upbeat reporting season for Wall Street's biggest banks, which benefited from rising income from interest payments.

Profit at rival Goldman Sachs also dropped less than expected in the third quarter.

(Reporting by Manya Saini, Noor Zainab Hussain and Niket Nishant in Bengaluru and Tatiana Bautzer, Sinead Carew and Saeed Azhar in New York; Editing by Megan Davies, Lananh Nguyen, Shounak Dasgupta and Nick Zieminski)