Investment banking giant Morgan Stanley (NYSE:MS) recently reported second-quarter EPS growth of 49%. In addition to receiving a big boost from tax reform, the bank's revenue grew dramatically in several key areas of the business.
A full transcript follows the video.
This video was recorded on July 23, 2018.
Michael Douglass: Let's turn to Morgan Stanley. Remember, one of the really important things when thinking about any one company's success or failure is to look at their closest comps wherever possible. If somebody makes smartphones, you want to compare to other folks making smartphones to understand whether there are secular trends or there are things that are really specific to that company. Remember that lens as we talk about Morgan Stanley.
Like Goldman, a great quarter by most measures. Earnings are up 49%. 12% revenue growth -- not quite as strong as Goldman's (NYSE:GS), but I'll take 12% revenue growth from a big bank any day of the week.
Matt Frankel: Yeah, definitely. You have to remember that Morgan Stanley doesn't have quite as big of a consumer banking growth engine and a fueling revenue. That's a big differentiator there. But, Morgan Stanley's earnings looked pretty great all around, just like Goldman's. Investing banking revenue was up 20%, just like Goldman. And just like Goldman, M&A activity, underwriting, IPOs were really strong areas.
The big difference in Morgan Stanley's earnings was, they blew trading expectations out of the water. Analysts expected trading to be pretty flat year over year, but Morgan Stanley's rose 9%, and it was evenly split between equities trading and fixed-income trading, which really made investors happy.
Wealth management and investment management, revenues were up by about 4% in both those categories. Not quite what the market wanted to see, but the trading revenue and great investment banking results really overshadowed that.
Douglass: One of the interesting things here is, usually, you see equity and fixed-income trading, to some extent, correlating negatively with each other. When one is up, the other one is down. For them to both grow at the same time is a really interesting outcome.
Frankel: They both grew at 9%, which was great. Like Michael said, normally one goes up and one is kind of weak. So, those are great all-around results. It seems like they're taking market share in trading from some of their rivals.
It was a really great quarter. Like I said, revenue growth, not quite as strong as Goldman's, so it seems like their earnings growth was more pulled from tax reform than Goldman's was. But, trading was a big differentiator, and that's why Morgan Stanley was the best performer of the bank stocks right after earnings.
Douglass: It's interesting, because when thinking about both Goldman and Morgan Stanley -- analysts were asking, on the Goldman call, "Why do you think the market hasn't rewarded you?" Management's response was, essentially, "Because these things need more time to play out. We don't really care about stock price today or tomorrow or next quarter. What we're really thinking about is, what business value are we driving several years down the road? And what will that mean for book value? And, therefore ... and everything kind of falls from that."
Morgan Stanley was interesting. One analyst essentially asked, "Hey, you all have had a lot of change. You've done a lot of new things. But it feels like everybody else is doing more new things." And Morgan Stanley's management was essentially like, "Listen, we're going to continue executing on the growth plan we have. We're obviously going to be looking into understanding better things like the digital bank," for example, which they really haven't played in much. But, "We're going to focus on the things that we know are going to be winners, and also keep in mind," I'm paraphrasing, "we've changed more in the last few years than in the previous 80. Give us some time to digest that change and really make sure we've gotten it right top to bottom."
I really liked management's response to those questions with both banks. I think that speaks to a mindset that can hopefully be a really good value driver for the companies long-term.
Frankel: That's actually a very interesting point to note. Both of these banks are evolving more in the past couple of years than they have throughout their whole history. It's really interesting to see how this is going to play out. I think that might be part of the reduced valuation. The market doesn't know what to expect with Goldman, consumer banking-wise. Are they going to get a little bit bigger, or are they going to become a consumer bank like Bank of America is? Similar with Morgan Stanley, they just don't know what to expect yet. These could be great revenue drivers, or they could just be experiments that don't go anywhere. That's one of the reasons you might see a depressed valuation right now.
Douglass: Yeah, makes a lot of sense. Of course, depressed valuations, because the market doesn't know what to expect, can be opportunities for those of us who think we know what we can expect.