Morgan Stanley reported a 19% decline in first-quarter profit compared to the same period last year, mainly due to the ongoing sluggishness in deal making. Despite the decline, the bank recorded a profit of $2.98 billion or $1.70 per share, which exceeded analysts’ expectations of $1.63 per share. While the revenue for the quarter declined by 2% to $14.52 billion, it was still higher than the expected revenue of $13.97 billion.
However, the bank’s shares fell by 3% during premarket trading. Investment banking revenue, which includes earnings from mergers and acquisitions, also dropped by 24% to $1.25 billion in the first quarter. The decline in investment banking revenue was not exclusive to Morgan Stanley, as JPMorgan Chase & Co., Goldman Sachs Group Inc., and other peers also experienced a similar dip.
Several factors, including higher interest rates, fears of a potential recession, and an unstable stock market, are deterring many corporate executives from pursuing deals or taking their companies public. Additionally, the recent collapses of small or midsize US banks have further contributed to market uncertainty. To mitigate the impact, Morgan Stanley and other large US banks provided $2.5 billion in uninsured deposits to First Republic Bank to prevent a run on deposits.
Morgan Stanley, a major player in trading and deal making on Wall Street, was able to weather market volatility in the first quarter of 2023 thanks to its wealth-management business. This unit, which made up approximately 45% of the bank’s total revenue for the quarter, saw an 11% increase in revenue. Additionally, Morgan Stanley continued to attract retail-trading customers, with 8.1 million customers at the end of March, up from 7.6 million the previous year. However, the average daily number of retail trades handled by the company decreased to about 831,000 from over 1 million a year ago.
Investment banking revenue declined 24% at Morgan Stanley, and similarly fell 19% at JPMorgan and 26% at Goldman Sachs. According to Morgan Stanley CEO James Gorman, investment banking activity continued to be constrained. Goldman CEO David Solomon added that M&A conversations slowed down during the banking crisis, but that Goldman had recently seen signs of a potential increase in deal-making.
Some bankers see opportunities for deal-making in midsize categories, for companies valued in the single-digit billion dollar range up to below $20 billion. Others hope that the recent banking crisis will spur M&A activity among smaller banks, which may now be more willing to be acquired.