A 32 per cent drop in first quarter profits was reported by the lender Morgan Stanley amid the coronavirus pandemic months which caused a complete stalling in deal making. The bank also warned of further hit to its operations and consequently profits because of the pandemic in the next few months too.
The results of the bank reflected a general trend in first-quarter earnings for the banks of the United States with reporting of significant drop in profits. Many set aside billions in reserve as a cover for a period of defaults in loans because of the coronavirus pandemic crisis which has increased unemployment in the US by the millions while severely impacting the cash flow of companies.
One of the major differences between the operations of Morgan Stanley and the other big six US banks is its relatively much smaller portfolio of consumer loans and credit card business, which are expected to get a hit for banks such as JPMorgan Chase. Morgan Stanley also does not have significant balance sheet investments like those of rival Goldman Sachs.
Revenue from the wealth management business of Morgan Stanley which typically accounts for about 50 per cent of the total revenues of the lender, reported a drop of 8 per cent to reach $4.04 billion primarily because of the very high volatility in the financial markets because of the coronavirus pandemic. A pre-tax profit margin of 26.1 per cent, below the bank’s target range of 28-30 per cent, was reported by the wealth business of the firm which impacted the results because this business has been relied on by the bank as a sustained and reliable source of revenue during periods of volatility in the market.
“Over the past two months, we have witnessed more market volatility, uncertainty and anxiety as a result of the devastating COVID-19 than at any time since the financial crisis,” said Chief Executive Officer James Gorman, who recently recovered from COVID-19, the disease caused by coronavirus.
During the quarter, there was a stop of 11 per cent in advisory revenue of the bank because or a drastic reduction in deal making which is expected to slow down massively in the forth coming months because of the coronavirus pandemic and related lockdown and an impending global recession.
One of the few big-ticket acquisitions during a quarter when there was a huge decline in deal making was Morgan Stanley’s $13-billion deal to buy discount brokerage E*Trade Financial Corp. However since the deal happened to take place at a time when the coronavirus broke out throughout the world and very dramatically in the US, therefore Gorman could face the difficult proposition of justifying the deal to the company’s investors.
Amid the general gloomy performance report, the trading business of the bank noted a 30 per cent growth in revenues which was primarily because of some of the wildest swings in the market in recent times. A 29 per cent surge in revenues from bond trading and a 20 per cent growth in revenues from equity trading contributed to the surge in the bank’s trading business.
“While it’s too early to predict how this (coronavirus) will unfold, Morgan Stanley navigated the quarter well given the conditions,” Gorman said.
(Adapted from Reuters.com)