Morgan Stanley (NYSE:MS) reported 1Q13 EPS (ex. DVA) of $0.61, vs. consensus of $0.55. A one-time tax benefit of $142 million added $0.07, taking core EPS down to $0.54. Many analysts view Morgan Stanley (NYSE:MS) results as a miss, as much
weaker-than-expected fixed income trading (down 42% YoY) was only partially offset by a better pre-tax margin in GWM (17% in a seasonally weak quarter).
Goldman questions whether the FICC RWA reduction plan will actually be revenue-neutral. They note that while comp expenses were down 5% YoY, firm-wide comp ratio was flat at 50% (ex-DVA) and non-comp expenses were actually up 2% YoY.
Morgan Stanley (NYSE:MS) demonstrated some operating leverage, with expenses coming in $120 million lower than forecasts (versus revenues beating by $140 million). The benefit came from non-comp expenses, which, at $2.3 billion, were down about $150 million from the 4Q level. MS has been diligently focusing on these costs over the past several quarters.
Analysis
FICC weak on a seasonally strong quarter. MS saw its FICC revenue decline 42% YoY (peers -8%) on weaker commodities and rates. While the outsized decline was partially expected given outsized commodities gains in 1Q12, analysts look for color on how much was driven by RWA reduction. It should be noted that like last quarter, the increased diversification and better performance of other areas (factoring in both top line and expenses) are able to compensate, and that represents an enhancement to the MS investment thesis against history. Still, the results drove a roughly 6% ROE for the quarter, a sign of progress yet to be made, though with important catalysts on the horizon.
Global Wealth Management
Morgan Stanley (NYSE:MS)’s wealth management division saw pre-tax margin expand to 17.2%, up 0.3% QoQ and 5.0% YoY. Margin expansion was driven by lower noncompensation expenses, likely driven by lower integration costs. While revenue was up 4% QoQ, this was driven by better investment banking and trading revenue, which tends to be more volatile.
Equity trading ($1.6bn ex-DVA) was down 13% year-over-year, in line with large US peers (-8%).
Another area of upside within Institutional Securities, captured in the other revenue line, were contributions from the Mitsubishi UFJ JV in Japan. This represented about $80 million of upside versus forecasts, and management has been telegraphing improving results out of this unit.
Investment banking
Morgan Stanley (NYSE:MS)’s I-Banking (+15% YoY) was in line with peers (+21%), as equity underwriting was strong. That said, it remains to be seen if advisory revenue can replace strong DCM revenue given a slowing M&A backlog.
Via RBC Capital
Positives in the Quarter for Morgan Stanley (NYSE:MS)
1) Great wealth mgmt results with pre-tax profit margin of 17% and fee based asset flows of $15.3bn;
2) Solid equity UW (+65% y/y, +19% q/q) and equity trading (-19% y/y, +14% q/q);
3) MS ahead of RWA wind-down goals with FICC RWA at $253bn (vs. $255bn 2013 year-end target);
4) Other revs up $86mn vs. last year on strength of JV in Japan;
5) Headcount down 3% q/q, 7% y/y so cost saves in motion;
6) 7.5% ROE (+170 bps q/q) trails peers (vs. GS’s 12.4%), but showing progress;
7) Comp (43% ratio at the IB) and non-comp expenses mostly in line;
8) Asset management long-term inflows of +$2.5bn;
9) Book value ($31.22) and tangible book value ($27.39) both ~+2% q/q.
Issues in the Quarter for Morgan Stanley (NYSE:MS)
1) Good bounce back in FICC, but still down 42% y/y on weaker commodities and rates (vs. single digits for the others)
2) M&A (-20% y/y, -45% q/q) and debt UW (+12% y/y, -23% q/q) were softer too
3) 7 cent tax benefit (we knew of 4 cents)
4) Total assets grew $20bn or 3% from last quarter
