In the fourth quarter of 2022, Morgan Stanley (NYSE:MS) did better than the estimate of $1.25 per share. Since the last quarter, the bottom line has gone down 37%. We thought we would make $1.30.
After better-than-expected earnings, MS stock went up 1.3% before the market opened. On the other hand, things will be clearer after a full day of trading.
The business of investment banking (IB) could have done better. From the previous quarter, fees for underwriting equity fell by 73%, while fees for underwriting fixed income fell by 38%. The fees for advice were 34% less than the year before. So, IB fees went down by 49%.
Even though an increase helped the top line in net interest income because the total loan balance went up by 11% and interest rates went up, a drop in non-interest revenues was a headwind.
Even so, as expected, Morgan Stanley’s trading business did well. The income from trading fixed-income rose by 15% from one year to the next, but the income from trading stocks fell by 24%.
Operating costs went up from year to year, which was bad.
Taking into account, the costs of integrating the E*Trade Financial (closed in October 2020) and Eaton Vance (closed in March 2021) transactions, net income applicable to common shareholders (GAAP basis) was $2.11 billion, a 41% drop from the previous quarter. The metric was estimated to be worth $2.07 billion by us.
The fourth quarter of 2022 was also affected by costs related to an action taken by an employee in December. A net discrete tax benefit partly offsets these costs.
The Consensus Estimate for 2022, which was $6.30 per share, was beaten by the adjusted earnings of $6.36 per share. The bottom line is 23% less than it was last year. We thought we would make $6.33. Full-year net income applicable to common shareholders (GAAP basis) was $10.54 billion, a 28% decrease from the previous year. We thought that the metric would be worth $10.50 billion.
Revenues Fall While Expenses Rise
Net sales for the quarter were $12.75 billion, a 12% drop from the same quarter the year before. The top line was more than the $12.16 billion that was expected. Our revenue forecast was $11.69 billion.
In 2022, net sales were $53.67 billion, 10% less than the year before. The top line was more than $53.08 billion than expected. We thought that we would make $52.61 billion in 2022.
In the third quarter, net interest income was $2.32 billion, 11% more than in the second quarter. Most of the increase came from a rise in interest income, partially offset by a rise in interest costs. We thought that NII for the fourth quarter would be $2.52 billion.
The total non-interest income of $10.43 billion was 16% less than the same time last year. We thought that the metric would be worth $9.18 billion.
The total amount spent on things other than interest was $9.87 billion, which is 2% more than the same time last year. We thought it would cost $8.73 billion.
In the fourth quarter, the amount set aside for credit losses was $87 million. This was up from $5 million at the same time last year. It was thought that provisions would cost $42.6 million.
Institutional Securities had a pre-tax income of $748 million, which was 75% less than the same quarter the year before. We thought it would cost $1.21 billion. Net sales were $4.8 billion, 28% less than the year before. We thought that our total sales would be $4.94 billion. The downturn was caused by less money from investment banking, which was partially offset by more money from fixed-income trading.
Wealth Management: The results of E*Trade Financial are part of this segment. The income before taxes was $1.84 billion, up 30% from the previous year. We thought it would cost $1.50 billion. Net revenues were $6.63 billion, up 6% from the previous quarter due to higher net interest income and other income. We expected total revenues of $5.67 billion.
As of December 31, 2022, all client assets were worth $4.19 trillion, a 16% drop from the previous year. We thought it would be $4.29 trillion.
This part has the results from Eaton Vance. Pre-tax income was $214 million, down 58% from the previous quarter. We thought it would cost $219.7 million. Net sales were $1.46 billion, 17% less than the year before. The drop was caused by a drop in performance-based income, other income, and fees related to managing assets. We expected total revenue of $1.19 billion.
As of December 31, 2022, there were a total of $1.31 trillion in assets under management or supervision. This was 17% less than on December 31, 2021.
Strong Financial Position
As of December 31, 2022, the book value per share was $54.55, down from $55.12 at the same time in 2021. The tangible book value per share was $40.06, down from $40.91 as of December 31, 2021.
Morgan Stanley’s Tier 1 capital ratio (advanced approach) was 17.5%, down from 19.1% in the previous quarter. The ratio of common equity to Tier 1 capital was 15.6%, which was lower than last year’s 17.4%.
Capital Deployment Update
During the reported quarter, Morgan Stanley bought back $1.7 billion in shares. In 2022, the company will buy back $9.9 billion worth of MS stock.
How We See Things
Most likely, franchise investments will continue to cut into Morgan Stanley’s profits in the short term. This is because franchise investments lead to higher costs. We worry about how well the capital markets are doing. Still, the company’s new focus on lending to businesses will continue to help sales. Also, higher interest rates are likely to boost net interest income growth.
Featured Image: Unsplash @ Sven Piper
