Morgan Stanley (NYSE:MS) was among the last of the big U.S. banks to report fourth-quarter financial results. And they certainly didn't save the best for last.
Not only did Morgan Stanley miss earnings expectations, but some of the bank's key metrics look absolutely terrible when compared with peers, many of which reported fantastic numbers. With that in mind, here's a rundown of Morgan Stanley's fourth-quarter earnings and why the bank missed estimates so badly, sending shares down over 5% on Thursday morning.
The headline numbers
While the top- and bottom-line numbers never tell the full story of how a company did in any particular quarter, it's still important to mention that Morgan Stanley missed expectations on both. Earnings of $0.80 per share were $0.09 less than analysts had expected. The revenue number was an even bigger miss: Morgan Stanley generated $8.55 billion in revenue for the quarter, about $750 million less than Wall Street was looking for.
What went wrong?
Here's a rundown of why Morgan Stanley's fourth-quarter numbers were so weak:
- Trading revenue was a big trouble spot, particularly when it comes to fixed income. To be sure, fixed-income revenue was weak across the board in the financial sector, but Morgan Stanley's 30% decline was worse than any of the other big players' results. In fact, the fixed-income trading business accounted for roughly a third of the bank's revenue miss all by itself.
- The firm's massive wealth management division was also weak, with $4.14 billion in revenue missing expectations by more than $300 million. Pre-tax income from the division declined by more than 12% year over year.
- Although revenue fell by $1 billion from the same quarter a year ago, non-compensation expense was up by roughly $100 million. Lower revenue and higher expenses are a recipe for bad profitability. Indeed, Morgan Stanley's 7.7% return on equity for the quarter was well shy of the 10% industry benchmark.
Some bright spots
Bank earnings are usually a mixed bag -- not all bad and not all good. That's definitely the case here. Although it's fair to say that the bad in Morgan Stanley's earnings report outweighs the good, there were still a couple of decent data points worth noting:
- Mergers and acquisitions advisory revenue increased by more than 40% year over year, which helped to offset lower investment banking revenue from equity and debt underwriting.
- Morgan Stanley repurchased 97 million shares of its stock during 2018. This represents more than 5% of the total outstanding shares.
These numbers look really bad when compared with peers
Perhaps the biggest issue is that Morgan Stanley was a negative standout in a sea of otherwise-strong bank earnings so far. For instance, fellow investment banking giant Goldman Sachs (NYSE:GS) handily beat earnings and revenue estimates. Its fixed-income trading revenue declined by a more modest 18%, and wealth management revenue grew from a year ago despite the market's poor performance.
The takeaway: While earnings season is just getting started, Morgan Stanley certainly looks like the biggest disappointment among the big U.S. banks.