Morgan Stanley (MS 0.20%) recently reported its third-quarter earnings, and the numbers look pretty solid. In fact, most banks reported good quarters, but Morgan Stanley was one of the standouts.
The company grew its revenue by 10% year over year, and some of the individual businesses within Morgan Stanley grew at extremely impressive rates. For example, the wealth management business grew revenue by 8%, and increased its profitability by improving efficiency. And the company's institutional securities business grew by 22% year over year, including a 43% increase in mergers and acquisitions advisory revenues and an incredible 97% gain in equity underwriting, reflecting the strong IPO market.
While Morgan Stanley's numbers speak for themselves, there are a few things that were said during the post-earnings conference call that investors should pay attention to.
There are still a lot of opportunities for growth
Even after the excellent growth of the past few years; Morgan Stanley still has room for more according to Chairman and CEO James Gorman.
Opportunities the company would like to explore further include growing the banking side of the business, particularly by exploring new opportunities in merchant banking and real estate. And, the company wants to use technological advances to run more efficiently in all areas of the business.
Basically, the company is going to keep finding new avenues for growth, and it also intends to build upon the areas of the business that have been the most successful, such as the leading position in cross-border M&A deals.
Happy with current capital levels
During the third quarter, Morgan Stanley issued a billion dollars in new preferred stock. When asked if investors should anticipate a further issuance, the company said they have no plans to issue any more preferred shares this year.
Basically, banks issue preferred stock because they are a flexible tool that allows them to meet the desired level of capital reserves. So, this is a good indicator that the Morgan Stanley is happy with its current capital levels.
Expenses are lower, but there is still more to do
As I briefly mentioned in the introduction, Morgan Stanley has improved its efficiency as its revenues have grown. Specifically, expenses are lower than they used to be as a percentage of total revenue.
For example, the wealth management business actually has about 350 fewer representatives than a year ago, but each of the 16,162 representatives still employed by Morgan Stanley bring in an average of $932,000. This is a 10% year-over-year increase and a record high for the company.
And, although expenses have improved even more than the company had hoped for, management thinks it can do even better. In 2012, the company's expense ratio was about 84% and it set a goal to lower this to 79% by the end of 2014. Well, year to date, Morgan Stanley's expense ratio is at just 77%, two percentage points better than the goal.
However, management says they remain focused on expense management, and that it needs to be an ongoing part of how the business is run, no matter how efficient the company gets.
Rising rates could mean a fast profit boost
When asked about the prospect of interest rates rising, CFO Ruth Porat said that overall, rising rates are a good thing for the company. Not only would it help grow net interest income, but the overall economic implications could mean great conditions across the board.
Specifically, if the Federal Reserve begins to increase the Fed funds rate, it would likely mean that the overall economy is doing very well. This should help Morgan Stanley's business across the board, with increased IPO and M&A activity, strong investment returns for clients, and solid trading revenue.
Management isn't too worried about the recent market volatility
Finally, since the conference call took place at the bottom of the recent market sell-off, the question of how Morgan Stanley feels about the market conditions arises.
And, Porat basically said that the investment banking pipeline is still strong despite a challenging couple of weeks, especially for the trading business. It was also pointed out that choppy market conditions are nothing new, and that it's impossible to know what will happen next.
My takeaway is that management is confident that the company will deliver solid performance no matter what the market or overall global economy is doing. Of course, everyone would prefer strong, predictable markets, but as we all know, it doesn't always work out that way.
