Modest dealmaking rise wasn’t enough to turn around Morgan Stanley’s profit slide

Article by Tyler Van Dyke | Jul 19, 2023

The news: Morgan Stanley posted another quarter of falling profits on Tuesday, with pre-tax income sliding 13% annually to a three-year low of $2.18 billion, per its earnings release.

Revenues were up 2% year over year (YoY) to $13.46 billion.
Credit loss provisions increased by $60 million.
The bank’s wealth management side was rosier: revenues surged $934 million YoY to $6.66 billion, thanks in no small part to a more than 23% increase in net interest income.

Let’s make a deal: A dramatic contraction in mergers and acquisitions (M&A) has hammered banks over the last year—but things may be looking up.

Global dealmaking activity plunged 40% YoY to $1.34 trillion, according to Dealogic.
That led to a punishing 37% drop in investment banker revenues. Morgan Stanley’s Q2 advisory revenues fell roughly 24% YoY.
But global M&A volume rose 23% from the first quarter to reach $739 billion in Q2. US volume also increased over the quarter, though it still languished nearly $100 billion short of volume from the same quarter a year ago.
Banks are also reporting more dealmaking conversations and expect Q2’s increase to carry into the rest of the year, per The Information.

The big takeaway: While banks still have plenty to worry about, whispers of optimism are growing louder.

Other banks have reported stronger consumer spending growth on the back of retreating inflation and a surge in positive consumer sentiment.
Goldman Sachs dropped its forecast of a recession in the next year to 20%, and the dollar plunged—a positive sign for a host of international and domestic markets.

If these developments continue, it could be a welcome sign to banks to ease up on setting aside cash for loan losses and an opportunity to cinch more advisory fees from M&A activity. It could also encourage banks to unwind some of the credit tightening that seized lending volume after the banking fiasco earlier this year.