3Q23 profit down 9% amid Investment banking slump
- Although 3Q23 earnings were slightly ahead of consensus, investment banking fees and net new assets were weaker-than-expected
- Higher interest rate remained another drag, as it delayed investment banking activities, led to NIM contraction and discouraged fee income from risky asset trading and investment
- Yet, improving M&A activities, successful completion of e-Trade integration and strong shareholder return kept us positive on the stock; maintain BUY with TP of US$90
Investment banking slump. 3Q23 earnings were down 9% y-o-y to reach US$2.4b. Despite that earnings were slightly ahead of consensus’ US$2.3b, the weaker-than-expected investment banking revenues (-27% y-o-y) and the slower wealth management inflows (-45% q-o-q) were disappointing. Wealth management net interest income was down US$0.2bn or 9% q-o-q due to higher average cost of deposit (+37bps q-o-q), which also weighed on profit. Trading businesses were more resilient, with revenue from equities and FICC businesses up 2% y-o-y and down 11% y-o-y respectively. Capital front was stable with CET1 ratio at 15.5%, after completing US$1.5b of share repurchase during the quarter. The company also declared quarterly dividend per share of US$0.85, implying a c.4% annualised yield.
Solid business momentum while awaiting the end of rate hike. The higher-for-longer interest rates have inevitably weighed on the company’s performance. Despite seeing pent-up investment banking activities, the corporates are still awaiting for more clarity on cost-of-financing to pull the trigger. The shift in deposit mix has also continued led to NIM contraction. The 4-5% cash return also has discouraged customer from trading and increasing allocation to risky assets, which weighed on the fees as well. On a positive note, the company has seen higher M&A announcement during the quarter which should convert to revenues in 1H24. It has also finally completed the integration of e-Trade, and the revenue synergy should gradually surface and reinforce Morgan Stanley’s strong wealth franchise. Maintain BUY with a lower TP of US$90, pegged to 1.5x FY24F P/B, to reflect the increased pressure seen from higher interest rates.
