Morgan Stanley wealth management reports record high margins in Q2

Morgan Stanley said on Thursday its wealth management division had a record pre-tax profit margin of 28.2% in the second quarter.

The strong showing from the firm's wealth management arm easily offset softness in equities and fixed-income trading, Wall Street analysts said.

But some analysts wondered if the record wealth management margins could cost the bank future growth.

“You can always take it higher, but there's a trade-off between investing for growth and making sure you have the revenues coming in for the next several years,” one analyst told Gorman on Thursday.

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Morgan Stanley's wealth management unit managed to bring in record revenue and margins for the second quarter even as many of the bank's other businesses stumbled, but it may have been too much of a good thing.

Analysts voiced concerns about just how sustainable those margins might be, and pointed out that the bank has not updated its targets for the division, even though it has been running above its own goals. Still, most said that wealth had balanced out Morgan Stanley's more volatile businesses well in the second quarter.

The New York-based bank's wealth management arm brought in record pre-tax income of $1.2 billion. Revenue rose 2% to $4.4 billion from the same quarter last year, and pre-tax profit margin came in at 28.2%. That was a record margin for wealth, Morgan Stanley chief executive James Gorman said.

That solid showing stood in contrast to revenue drops in more market-linked areas like trading that have been erratic quarter-to-quarter.

“While it's never fun to see double-digit declines in M&A, debt underwriting, FICC and equities,” growth in wealth management as well as investment management “led the way” for the quarter, Evercore ISI analyst Glenn Schorr wrote in a note.

Some wondered what the future holds for a critical operation that's been a stable business for the bank. Morgan Stanley and its peers are all grappling with defensive investor positioning amid geopolitical uncertainty and a slowing economic backdrop, even with equity markets near record highs.

One analyst pressed Gorman about the wealth management profit margin on the firm's earnings conference call on Thursday. Goldman Sachs analysts questioned the margin's sustainability in a note. And another analyst pointed out that while margins in wealth management were high, management did not update its guidance on that front.

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Mike Mayo, the veteran bank analyst now at Wells Fargo, asked Gorman about profitability and investing for the future. The bank had flagged its “tightly-managed” non-compensation costs for wealth management in its earnings release.

“There's a trade-off between investing for growth and making sure you have the revenues coming in for the next several years,” Mayo said.

“I don't sort of jump around and start dancing when we're a few basis points above our range, and I'm not going to be too distressed if it's a few basis points below the end of the range at any point this year,” Gorman said. “It's in a great position, the margin in that business.”

Goldman Sachs analysts, who have a neutral rating on Morgan Stanley, immediately flagged the wealth margin in a report to clients on Thursday morning.

“We await clarity on the call on ... guidance around the sustainability of the PT margin in wealth management which is now running at a post-Crisis high of 28.2%,” analysts led by Richard Ramsden wrote.

Brian Kleinhanzl of Keefe, Bruyette & Woods, who also has a neutral rating on the bank, noted that Morgan Stanley didn't take update key wealth management targets even after the solid results.

“One key was that although the efficiency ratio was below management's target and WM pretax margins were above, management is not updating targets at this time,” Kleinhanzl said in a report.

To be sure, the vast majority of analysts polled by Bloomberg are buy-rated on Morgan Stanley.

The quarter held few surprises, said Devin Ryan, equity analyst at JMP Securities in New York who holds a “buy” rating on the bank. Wealth management continues to be a stable corner of the bank, he said.

“The business tends to be a lot steadier than the overall balance of Morgan Stanley,” Ryan said in an interview.

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