Please ensure Javascript is enabled for purposes of website accessibility

Morgan Stanley Posts Record Profit Despite Losses from Archegos

By Courtney Carlsen - Apr 23, 2021 at 6:49AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The bank posted over $15 billion in revenue with strong growth in its investment and wealth management segments.

Morgan Stanley (MS 0.91%) posted a record first-quarter profit that crushed analysts' expectations, beating on earnings-per-share estimates by nearly 30%. And that's counting more than $900 million in losses it suffered from the blowup of hedge fund Archegos Capital Management.

The bank has made a concerted effort to diversify its revenue streams away from investment banking -- and it's beginning to pay off. Morgan Stanley saw its wealth management and investment management segments both post strong growth, thanks to improving economic conditions and the ongoing integration of the newly acquired E*Trade and Eaton Vance.

Image of a bank building.

Image source: Getty Images.

Acquisitions drive wealth and investment revenue

Morgan Stanley's overall revenue reached $15.7 billion in the first quarter, up 61% from the same period last year and even rising 16% from the fourth quarter. Its institutional securities segment, which includes traditional investment banking revenue, grew 66% to $8.6 billion, boosted by increased mergers-and-acquisitions activity and higher volumes in IPOs.

While investment banking was strong, Morgan Stanley is more excited about the impact its recent acquisitions will have on its other segments. This was the first quarterly earnings period that includes both E*Trade and Eaton Vance (although only one month of the latter is included, since the acquisition closed on March 1). The acquisition of these companies cements Morgan Stanley's push into investment and wealth management, providing it with a more stable source of revenues for different economic environments.

In the first quarter, wealth management revenue was $6 billion, up 47% from the prior year. This segment reflects the acquisition of E*Trade and saw strong growth in asset management and transaction fees from the trading platform. According to CEO James Gorman, this acquisition has already exceeded expectations, as daily trades reached a record high with retail engagement.

Additionally, the bank brought in $1.3 billion from investment management, up 90% from last year. This segment was boosted by the Eaton Vance acquisition, which increased Morgan Stanley's assets under management (AUM), causing asset management fees to rise along with it. The bank now boasts $1.4 billion AUM in this segment, up from $584 million just one year ago.

Both acquisitions should help Morgan Stanley smooth out its revenue over time. In the past, the bank has been heavily reliant on investment banking for income. However, market environments change, and at some point M&A and IPO activity will not be as hot as they are now. During these times, the bank will have its wealth and investment fees to help steady the ship.

A word on Archegos

Morgan Stanley was one of several banks caught up in the Archegos fund blowup. The hedge fund went from $20 billion to zero in just two days due to its extreme use of leverage, and Morgan Stanley provided prime brokerage services to the hedge fund.

The investment bank was quick to liquidate its positions related to Archegos, setting off a chain reaction of selling in several stocks, including ViacomCBS and Tencent Music. The bank liquidated any positions related to Archegos out of an abundance of caution, and was left with $911 million in losses. While these losses put a damper on what was otherwise a tremendous quarter, investors can take solace in the fact that the company's quick actions prevented it from losing upwards of $10 billion.

Overall, investors have reason to be encouraged. The integration of E*Trade and Eaton Vance will help Morgan Stanley continue its expansion into wealth and investment management, and should help steady the company's revenues over the coming years.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Morgan Stanley Stock Quote
Morgan Stanley
$76.75 (0.91%) $0.69
Tencent Music Entertainment Group Stock Quote
Tencent Music Entertainment Group
$5.24 (4.38%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.