By Niket Nishant, Tatiana Bautzer and Manya Saini
(Reuters) -Morgan Stanley's third-quarter profit showed a hit from lethargic dealmaking and shares sank 6.5% as investors were also disappointed by smaller inflows to the wealth management division and the lack of announcements in the CEO succession.
The bank saw a 27% drop in investment banking revenues from a year earlier and sluggish trading as dealflow took a hit when geopolitical risk rose and the Federal Reserve aggressively raised interest rates. Morgan Stanley underperformed the market, with global investment banking fees down 17% in the quarter according to Dealogic.
Net new assets in wealth management shrank to $35.7 billion from $64.8 billion a year earlier.
“It looks like the path to growth is going to have more potholes than many of us expected,” said Brian Jacobsen, chief economist at Annex Wealth Management, which includes Morgan Stanley shares in some of its portfolios.
Specifically, Jacobsen cited lighter-than-expected wealth management numbers and Gorman's growth outlook.
"The market was disappointed with wealth management and investment banking, divisions that have represented tailwinds to Morgan Stanley, said Jason Ware, Chief Investment Officer at Albion Financial Group.
The wealth division and trading unit were hit by the rise in interest rates as clients opted to invest in money market funds instead of putting it in wealth management portfolios, he added.
"When people have a choice of making 4%, 5% return by doing nothing, they're not going to be trading in the market," Morgan Stanley CEO James Gorman told investors. He said clients kept a cash position of around 23%, that he expects to go down as interest rates retreat over the next years.
The bank's profit dropped about 9% to $2.4 billion, or $1.38 per diluted share, a smaller drop than analysts had expected. Analysts had forecast $1.28 per share, according to LSEG IBES data.
Including Wednesday's performance, Morgan Stanley shares are down 12% so far this year. The S&P 500 bank index is down 11%.
Kenneth Leon, research director at CFRA Research, on Wednesday reduced its 12-month price target for the bank by $6 to $90 a share, but kept a 'buy' rating.
Analysts at Evercore complained about the lack of news on the long-anticipated CEO succession, which they said "is a mistake by the Board as more time can only increase angst and divide parties."
CEO James Gorman, who has run the Wall Street giant since 2010, announced in May that he would step down within a year. On Wednesday, he said the bank was close to an announcement.
The strongest candidates are co-presidents Ted Pick and Andy Saperstein, respectively heads of institutional securities, which includes investment banking and trading, and wealth management, while Dan Simkowitz, head of asset management, is also being considered, Reuters has reported, citing a source.
INVESTMENT BANKING
Gorman said although he saw recent improvement in M&A and capital markets transactions, he expected most of the activity to materialize next year.
Morgan Stanley's revenue in fixed income underwriting fell even as rivals grew in the segment. CFO Sharon Yeshaya said the bank could not be compared to rivals as it has considered capital allocation rather than only fees in debt transactions.
Trading was also muted, with a 2% rise in equity trading and 11% drop in fixed income. The CEO has said the results of each unit will not be a factor in choosing the next CEO.
CRE WEAKNESS
Morgan Stanley also set aside $134 million in provisions for credit losses, surging from $35 million in the same quarter last year, driven by worsening conditions in commercial real estate (CRE). Part of the growth was a provision to cover losses with one specific loan that was not disclosed.
The results round out a largely upbeat reporting season for Wall Street's biggest banks, which benefited from rising income from interest payments.
Profit at rival Goldman Sachs also dropped less than expected in the third quarter.