Investment bank and financial services provider Morgan Stanley (NYSE: MS) share trades down (-17%) compared to peers Goldman Sachs (NYSE:GS) (-13%) and Charles Schwab (NYSE: SCHW) only down (-6.5%). The blue-shoes investment bank has implemented a strategy to diversify its services and clientele. Being fortified retail customer base with the $13 billion acquisition of E*TRADE in 2020. The advent of commission-free trading from, among others, Robin Hood (NASDAQ: HOOD) and Charles Schwab pressured Morgan Stanley to make a move. When it acquired E*TRADE, it also acquired 5.2 million customer accounts with more than $360 billion in assets to join its 3 million accounts and parry its asset and wealth management services. The uncertain macroeconomic headwinds negatively impacted the investment banking business, but the company was able to mitigate the weakness with a strong performance in fixed income and equity. Rising interest rates helped it achieve a 26.9% margin in its asset management segment thanks to higher net interest income. Normalization surplus downwards, as the market environment turned completely in 2022.
Weekly symmetrical triangulation on the map
The weekly candlestick chart for MS stocks shows the formation of a symmetrical triangle. This formation consists of a descending upper channel when bounces make lower highs and a rising lower channel when pullbacks descend to higher lows. Finally, the upper and lower channel lines converge at the apex. However, the breakout or breakdown tends to take place before reaching the top as proverbial steam builds up for a pause in either direction when the channel is broken. The top channel breakout is around $86.48 and the bottom channel breakout is close to $76.25. The stock bounced off the weekly MSL trigger at $80.59 as it approached the weekly 20-period exponential moving average (MA) at $82.82, followed by the weekly 50-period declining MA at $88.07. The volume tends to decrease until an outbreak or failure is caused. Investors may consider waiting for the resolution of the symmetrical triangle formation before accessing it.
The hangover of 2022
The Special Purpose Acquisition Company (SPAC) craze boosted Morgan Stanley’s investment banking revenues in 2021. SPACs hit the market en masse. However, that trend broke down pretty quickly in 2022 as the bear market lifted its ugly face, driven by high inflation and rising interest rates. This makes comparisons with 2021 difficult, as high investment banking costs have shrunk. This was evident from the (-55%) decline in investment banking revenues, comprising advisory, equity and fixed-income insurance revenues.
Recurring Earnings Basis
By integrating banking, wealth management, brokerage and wealth management services under one roof, Morgan Stanley is able to generate recurring income by collecting a percentage of its total assets on a monthly basis. This enables stable and predictable revenue streams and, in retrospect, makes the E*TRADE acquisition a brilliant move. A contraction in the main investment banking activities was partly offset by the strength of the wealth and asset management activities.
Management services on the way to the plate
On October 14, 2022, Morgan Stanley announced its second quarter 2022 results for the quarter ended September 2022. The company reported earnings per share (EPS) of $1.47, missing consensus analyst estimates at $1.51 (-$0.04). Total revenues declined (-12) year-over-year (year-on-year) to $12.99 billion and also lagged consensus analyst estimates at $13.31 billion. The company achieved a return on tangible equity (ROTCE) of 14.6% and its cost-efficiency ratio year-to-date was 72%. Net income from institutional securities was $5.8 billion, reflecting strong performance in fixed income and equities to mitigate the uncertain macroeconomic environment that constrains investment banking. Wealth management delivered a pre-tax margin of $26.9% from higher net interest income on higher interest rates. Investment management contributed $1.2 billion to income from assets under management (AUM) of $1.3 trillion.
Investment Bank Overruns on the Downside
Investment banking revenues were down (-55%) compared to the same period last year. Investment banking saw advisory revenues drop to $5.817 billion, from $7.495 billion a year ago. Insurance revenues slumped to $1.277 billion from $2.849 billion. Fixed income insurance revenues declined to $366 million from $567 million a year ago. James Gorman, CEO of Morgan Stanley, commented: “Wealth Management added $65 billion in net new assets and produced a pre-tax margin of 28%, excluding integration-related costs, demonstrating scale and stability despite declining asset values. While Investment Banking and Investment Management were impacted by the market environment, Fixed Income and Equity navigated difficult markets well. We continue to maintain our strong capital position, while repurchasing $2.6 billion in equities and paying a healthy dividend.”