Investment banks like Morgan Stanley suffered during last year's slump in corporate mergers, but a renewed appetite for dealmaking is finally reviving the New York-based company's fee income.
Morgan Stanley recorded 51% growth last quarter in the revenues it gets from investment banking activities, far outstripping the more subdued improvement in its wealth management business. Revenues from arranging stock deals and corporate debt offerings also jumped in the second quarter, a sign that Wall Street's bread-and-butter business is returning to full gear.
"We expect that we are still in the early innings of an investment banking rebound," Sharon Yeshaya, Morgan Stanley's chief financial officer, told analysts Tuesday on the company's second-quarter earnings call.
Morgan Stanley's earnings grew to more than $3 billion in the quarter, up from $2.2 billion a year earlier. CEO Ted Pick described his outlook for investment banking as "quite bullish," which bodes well for regional banks that arrange smaller mergers and capital markets deals for middle-market clients.
Deal pipelines among corporate clients are strong, Morgan Stanley's top executives said, as boardrooms have gained confidence from inflation easing and interest rates stabilizing.
Some of the expected activity in investment banking will represent a catch-up from last year, Morgan Stanley executives noted, when high interest rates and uncertainty dampened dealmaking. Deals may pick up further once the U.S. presidential election passes, they said.
"The game will have to go on because there's just been so much activity that has been suppressed," Pick said, pointing to a "multitrillion-dollar stockpile" of funds ready to fuel M&A and other deals.
Morgan Stanley's major competitors in the capital markets business have also reported stronger-than-expected investment banking results this quarter, RBC Capital Markets analyst Gerard Cassidy wrote in a note to clients. But Morgan Stanley saw stronger growth than any of them, he added.
The bank's stock price was up 1% in mid-afternoon trading on Tuesday. Strong investment banking results appeared to outweigh investors' concerns about a looming increase in the bank's deposit costs.
Morgan Stanley plans to raise the interest rate it pays on certain "sweep" deposits held by clients who work with its wealth advisors, according to Yeshaya, the bank's CFO. She cited a "backdrop of changing competitive dynamics" without giving more specific reasons.
That announcement came after a major competitor in the advisor business — Wells Fargo — raised its own pricing on sweep deposits to align more with the higher rates that investors can find in money market funds. Wells Fargo executives also didn't go into detail last week about the reasons. But Wells Fargo's move came months after the bank disclosed that the Securities and Exchange Commission was investigating its "cash sweep options."
Ken Usdin, an analyst at Jefferies, wrote in a note to clients last week that Wells Fargo's pricing adjustment was likely a reaction to the SEC's scrutiny.
The price hike by Wells seems to be rippling into other banks as they compete for the same wealthy clients. Bank of America also said Tuesday that it's made pricing changes on certain deposits within its wealth management arm.
Charles Schwab executives were also asked about the issue on Tuesday, and CEO Walter Bettinger said the firm had already been offering money market-type yields on the spare cash in investors' portfolios.
"I don't really see the Wells Fargo report having any kind of meaningful implications for us," Bettinger said. "We've been doing this for an extended period of time already."
