Morgan Stanley posted a big rebound in a business it once left for dead

  • Morgan Stanley just posted its best fixed income results in three years.
  • The bump came even after Morgan Stanley massively cut headcount and capital in its bond trading unit at the end of 2015.
  • Morgan Stanley’s fixed income results of $US1.9 billion were slightly behind those of rival Goldman Sachs.

Among the standouts in Morgan Stanley’s impressive first quarter earnings report was its standing in fixed-income.

The New York-bank, which reported record revenues and net income on Wednesday, posted its best fixed income results in three years.

That’s striking considering its a business the wealth management giant once de-emphasised. In 2015, it took an axe to fixed-income, cutting 25% of its workforce, replacing its leadership, and slashing bonuses.

In an earnings report in January 2016, the business was brutally described in a presentation: “Failed to meet objective: Initiated major restructuring.”

Ted Pick, Morgan Stanley’s head of sales and trading, said in early 2016 that the decision to rightsize the business was largely the result of the fixed-income wallet, or total revenue pool, shrinking by around 40%. Revenues for the business in the fourth quarter of 2015 came in at just $US550 million.

But a couple years on Wall Street can make a difference. Morgan Stanley’s fixed-income results of $US1.9 billion for the first quarter of 2018 were only slightly behind those of rival Goldman Sachs, which posted revenues of $US2.1 billion for the business. For Morgan Stanley, that marks the best quarter for the business since 2015.

The bank said the results reflect “higher results in foreign exchange and commodities, partially offset by lower results in credit products and rates.”

Morgan Stanley CFO Jonathan Pruzan later gave more detail on an analyst earnings call, saying the uptick in trading activity was helped by a sharp rise in interest rates which heightened volatility levels as well as a rise in inflation expectations.

Macro trading was solid, driven by better performance across rates and foreign exchange, Pruzan said. Securitized products had one of its best quarters in close to four years and commodities was also strong.

There were no “elephant type” trades which boosted bond trading, he added. “It’s really just sort of small outperformance in a lot of places across the globe.”

Brian Kleinhanzl, an analyst at KBW, described the results as such: “This was a strong trading quarter from MS and the company was able to take share in FICC relative to other companies that have reported.”

Morgan Stanley’s fixed income results were in stark contrast to many other Wall Street bank which struggled during the first quarter. Fixed income revenues were flat at JPMorgan, and down at Citigroup. Goldman saw a big jump of 23% in its bond trading unit.

Elsewhere at the bank, Morgan Stanley showed up Wall Street. Its reported adjusted earnings of $US1.45 a share, beating analysts’ expectations of $US1.28 a share. Its revenues from equities came in at $US2.6 billion, up 27% from last year.

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