(Bloomberg) -- Morgan Stanley’s Wall Street operations sputtered as a slowdown in trading and investment banking put a dent in earnings.
Revenue from the trading unit slid 22% from a year earlier and that, combined with a dealmaking slump, led to results that were weaker than analysts’ predicted. Record net revenue from wealth management helped cushion the blow.
The New York-based firm also racked up $308 million in severance costs tied to the more than 3,000 jobs it eliminated earlier this year to cope with the industry’s prolonged drought in dealmaking.
“The firm delivered solid results in a challenging market environment,” Chief Executive Officer James Gorman said in a statement Tuesday. “The quarter started with macroeconomic uncertainties and subdued client activity, but ended with a more constructive tone.”
While some of the biggest US banks reported earnings that beat expectations last week on the strength of their consumer-focused businesses, firms more reliant on trading and dealmaking — like Morgan Stanley — were expected to take a profit and revenue hit. Analysts predict Goldman Sachs Group Inc., which reports results Wednesday, may post one of its worst quarters in almost half a decade under Chief Executive Officer David Solomon.
Morgan Stanley’s second quarter profit fell 13% to $2.18 billion.
Morgan Stanley outlined a plan earlier this year to almost double profit from its wealth-management juggernaut in coming years. The bank’s new long-term goal of more than $12 billion in pretax earnings will come from a mix of asset growth, more lending and expanding markets. The unit, which has benefited from higher net interest income this year as a result of rising rates, reported revenue of $6.66 billion, up 16% from a year earlier.
Morgan Stanley’s fixed-income trading business posted $1.72 billion in revenue, falling short of analysts’ estimates of $2 billion. Equities-trading revenue fell 14% to $2.55 billion, “primarily driven by declines in cash and derivative products on lower client activity and lower volatility in the markets,” the company said.
Fees from advising on deals were $455 million, down 24% from a year earlier on fewer completed M&A transactions. Equity-underwriting revenue was $225 million and fixed-income underwriting was $395 million. Bankers are expecting capital markets to be more robust in the months ahead.
Gorman said in April that underwriting and mergers activity had been subdued and that he didn’t expect a rebound before the second half of this year or in 2024.
Morgan Stanley shares fell 0.2% to $86.18 at 7:43 a.m. in early New York trading. They had climbed 1.6% this year through Monday.
The stock had been outperforming the firm’s rivals as the bank repositioned itself under Gorman, who put a bigger focus on expanding the wealth-management business. Gorman, 65, said in May that he planned to hand the reins to a successor within 12 months. The race to replace him has come down to three top candidates: Ted Pick and Andy Saperstein, the New York-based firm’s co-presidents, as well as investment-management chief Dan Simkowitz.
There’s still some unfinished business for Gorman. The company has said it’s in talks with US prosecutors and regulators to resolve a probe into its block-trading practices. Gorman has identified the matter as one of the items he would like to handle before he steps down.
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