UPDATE: This article includes details from a conference call with executives, an interview with an analyst and research notes.
Morgan Stanley's investment banking revenue revved up in the third quarter, and executives are optimistic that a surge of initial public offerings is just around the corner.
New York-based Morgan Stanley reported investment banking revenue of $1.5 billion was up 56% from a year ago.
The result was in line with the
The way Pick sees things, markets in the United States and around the world are on the cusp of a surge in initial public offerings, a bread-and-butter business for Morgan Stanley.
"I would take the view that there are a whole bunch of great companies that are owned privately that do want to make their way into the public markets," Pick said on a conference call with analysts. "That currency allows them to make acquisitions, to set up long-term acquisitions and the like. What I'd expect to see are larger companies going public having been private for some time … I think there is a going-public phenomenon that will exist around the world."
EY recently reported that IPOs in the United States are up 29% from a year ago, totaling 130 listings. The firm said there is some caution in the market related to the uncertainty regarding the outcome of the U.S. presidential election, but it expects IPO activity to continue to progress.
Still, there's room for skepticism. Mike Taiano, vice president of the financial institutions group at Moody's Ratings, said IPOs "are still below where the historical trends have been."
Corporate owners "haven't necessarily felt the need to IPO some of the companies they hold," Taiano said in an interview Wednesday. "They're either able to sell to other private equity firms or haven't [needed] additional liquidity."
Pick believes the trend is about to change as private capital becomes more difficult to access. "When the investment banking cycle really kicks in and companies wish to engage in strategic activity … We're going to have the kind of presence to transact," Pick said. "Running the global investment bank is going to pay off for years to come."
Morgan Stanley's third-quarter earnings beat analyst estimates, buoyed by revenue gains across all of its business lines. Net income totaled $3.2 billion, or $1.88 per share, up from $2.4 billion, or $1.38 per share, in the year-ago quarter. Third-quarter earnings per share topped consensus estimates by 31 cents, according to Nasdaq.
The bank is "firing on all cylinders," Taiano said. "Strong flows on the wealth management and investment management side. You've got pretty strong growth, particularly in equity underwriting, [plus] another quarter of positive operating leverage across the firm, with revenues growing faster than expenses … A lot of positive developments."
The report boosted the stock. Shares peaked at $121.45 and were recently up nearly 7% at $119.74.
Wealth management revenue reached $7.2 billion, nearly half the $15.4 billion total revenue Morgan Stanley reported for the three months ended Sept. 30 and an increase of 14% from a year ago.
Wealth management client assets totaled $6 trillion at Sept. 30, 25% more than a year ago. That amount included $64 billion of net new assets, up from the $36.4 billion Morgan Stanley reported for the second quarter. Wealth management's 28.3% pre-tax margin edged closer to Morgan Stanley's 30% target. The pre-tax margin for the three months ended June 30 was 26.8%.
"Reaching a 30% pre-tax margin appears likely at some point in the not-too-distant future," Taiano said.
Combining its wealth and investment management business lines, Morgan Stanley's total client assets hit $7.5 trillion. "Expanding markets and increased client engagement should further support asset growth as we progress toward $10 trillion in client assets," Yeshaya said on the conference call.
Investment management revenue totaled $1.5 billion, up 9% from a year ago. The increase was driven by a $72 million increase in asset management fees.
While compensation and operating expenses totaled $11.1 billion, an increase of 11% from a year ago, Morgan Stanley's efficiency ratio declined to 72% from 75% in the third quarter of 2023, due to the increase in revenue.
On the capital front, Morgan Stanley was able to add $17.6 billion of risk-weighted assets to its balance sheet and expend $750 million on share buybacks, all while maintaining a Common Equity Tier 1 capital ratio north of 15%, Jason Goldberg, who covers the firm for Barclays, wrote in a research note.
