WM margin recovery takes time
- 4Q23 adjusted EPS was at US$1.13, slightly ahead of consensus of US$1.05, mainly on investment banking rebound
- Nonetheless, management guided lower-than-expected WM margins at mid-20% range given macro headwinds and continued investment for growth, disappointing some investors
- We think investment banking will be near-term driver ahead and WM margin will see gradual recovery; maintain BUY with TP slightly lifted to US$95
Slight beat in both revenue and earnings. 4Q23 net revenues was up 1% y-o-y to US$12.9b, slightly ahead thanks to stronger fixed income underwriting (+25% y-o-y). Both equities and FICC trading revenues were up 1% y-o-y. Wealth management net revenues were flattish as stronger fees offset decline in net interest income, while quarterly net new asset of US$48b was 8% y-o-y lower and slower than FY23 run-rate (US$282b). Investment management net revenues were little changed. Dragged by two regulatory charges totaled in US$535m, MS recorded earnings of US$1.5b. Adjusted EPS would be US$1.13 if excluding the impact of the charges. The company expects 1Q24 net interest income to be in-line with 4Q23, while wealth management margins to consolidate at mid-20% range in near-term (vs long-term target of 30%), due to the drag by geopolitical risks and investment for growth.
IB to shine, while WM margin recovery takes time. Morgan Stanley had achieved 30%+ margin on WM business before, but the decline in NII and client risk appetite (shifting more towards lower-fee products) have subsequently dragged the margin under the latest cycle. Nonetheless, we think the backdrop is improving and MS is still leading the game. Over 20% of client asset is still parking at cash and they shall gradually be deployed into equities as rate cut expectation increases. Also, the continuous conversion from workplace to advice-based model will also be accretive to margins. In addition, the investment banking activity is poised to rebound from historical low level as the pent-up acquisition / fundraising demand from corporates should get in the game after a few years. Maintain BUY with TP slightly lifted to US$95.