Morgan Stanley Earnings: Revenue Growth in 2023 Uncertain, as Nothing Can Be Relied On

The cyclical nature of some of Morgan Stanley’s MS revenue and potentially abnormally high trading revenue mean that revenue growth in 2023 is far from certain. Morgan Stanley reported net income to common shareholders of $2.8 billion, or $1.70 per diluted share, on $14.5 billion of net revenue in the first quarter. Net revenue only decreased 2% from the previous year and sequentially increased 14%. The main contributor to the relatively good revenue performance was trading revenue that increased 6% from the previous year and sequentially increased 37% to $5.7 billion. While the uncertain macroeconomic environment has kept investment banking revenue low—a 24% decline from the previous year and over 50% decline from the 2021 quarterly average—it has helped trading revenue. That said, trading revenue is volatile and it’s one of the only revenue lines that has held up well and is arguably abnormally high, so it can’t be counted on to offset economic pressures in other revenue lines. We don’t anticipate making a material change to our $91 fair value estimate for narrow-moat Morgan Stanley and assess the shares as fairly valued.

Some newer signs of pressure were apparent in the results. Provisions for credit losses were $234 million, up over 300% from a year ago and about 170% sequentially. Net charge-offs of $71 million also compared with less than $20 million for each of the previous six quarters. These credit metrics have ticked up due to the probability of a recession and pressure in commercial real estate markets but aren’t that concerning given the company has loans of about $200 billion and an allowance for credit losses of $1.5 billion. Net interest income growth was sluggish with only 1% sequential growth, and net interest income was 7% lower than its third quarter of 2022 peak. Morgan Stanley, similar to other investment service firms, is being affected by clients moving deposits to higher-yield products and higher funding costs.