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Fourth-Quarter Revenue Likely Sank at Morgan Stanley

Morgan Stanley Key Stats
   Q4 2022 (Est)  Q4 2021  Q4 2020
Adjusted EPS ($) $1.28 2.01 1.92
Revenue ($B) $12.5 14.5 13.6
 Investment Banking Revenue ($B) 1.3 2.6 2.4

Source: Visible Alpha

The firm’s results should reinforce the mixed challenges banks and the rest of the U.S. financial sector have faced as the Federal Reserve has raised interest rates to fight inflation.

Monetary policy tightening sent stock and bond markets reeling last year while raising recession concerns. Morgan Stanley’s shares have reflected the broader economic uncertainty. They’ve fallen 7.5% in the past year, with the S&P 500 falling 14%.

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JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo all released their fourth-quarter earnings results Friday, the first large U.S. banks to do so. As expected, recession concerns caused them to increase the assets they set aside to cover potential loan losses. But rising net interest income in their retail banking units, aided by rising interest rates, helped cushion the negative impacts of that increased expense and lower investment banking revenue from reduced M&A activity.

Morgan Stanley, however, relies less on interest income and more on its asset and wealth management businesses, for which it receives percentage-based fees based on the total amount it manages—amounts that fell in 2022 as U.S. stocks and bonds sank.

That segment typically accounts for about a third of Morgan Stanley’s revenue, and Visible Alpha estimates sales in that unit fell 16% in the fourth quarter.

Investment Banking Tanks

Suffering far more: the firm’s investment banking business, which makes up about a fifth of its revenue. Visible Alpha projects a 49% decline in sales for that unit, mirroring a malaise that slashed global investment banking revenue by half during the quarter, according to data from Dealogic.

How long the malaise persists remains unclear, but PwC in its recent “US Deals 2023 Outlook” said it sees some improvement possible from last year, during which just 97 initial public offerings got completed in the first three quarters of the year, an 87% decrease from the prior year.

“The pool of potential IPOs is significant and contains good opportunities,” PwC’s report states. “More than 650 potential unicorns may be looking for an exit, creating significant opportunities for investors and for corporates that could acquire VC-backed companies.”

Financial firms might need that boost as the year-over-year benefits of rising interest rates in boosting net income eventually dissipate, even though those benefits will continue into this year, said R. Scott Siefers, an analyst with Piper Sandler.

“We seem to be nearing the end of this just explosive expansion in (net interest) margins and almost straight up move in (net interest income),” Siefers said. “Investors will focus much less on (banks) fourth-quarter actual results than they will on the outlook.”

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