Morgan Stanley’s earnings targets would take “longer to achieve”, chief executive James Gorman warned on Thursday, after the bank reported that its profits had tumbled by almost a third in the first three months of 2020.
It was the first admission from a Wall Street banking chief that the coronavirus crisis would push financial goals beyond reach, in what has been a bruising start to the bank earnings season.
The total level of provisions across six major banks to cover potential loan losses from the economic fallout of the pandemic so far has mounted to $25.4bn for the quarter.
Morgan Stanley reported net income of $1.7bn in the first quarter, down from $2.4bn in the same period the previous year. The drop was less severe than experienced by rivals but profits fell just shy of the $1.8bn expected by analysts in a Bloomberg poll.
Three months ago, after celebrating record annual profits, Morgan Stanley unveiled a plan to raise return on tangible equity to a range of 13 to 15 per cent within two years, while boosting operating efficiency and improving profits at its wealth management powerhouse.
“We assumed a normal market environment,” Mr Gorman told analysts on Thursday. “The environment is anything but normal. The objectives we laid out will take longer to achieve.” He added that the bank “will have much greater visibility” on those objectives by the end of the year.
Return on tangible equity came in at 9.7 per cent for the first quarter, better than peers but worse than the 13 per cent Morgan Stanley earned for the full year 2019. Questioned on whether a 10 per cent threshold was the “bottom” for ROE, Mr Gorman told analysts: “I don’t want to call that now. I just don’t know how deep this recession is going to be.”
Mr Gorman said his bank might still hit the targets within its two-year timeframe but that it would be “irresponsible” to recommit to them given massive uncertainty. “A CEO that stands by their short term targets [set] right before this virus hit . . . I don’t know what planet they’re on,” he added. “We will not hit those targets in the second quarter, that I can promise you.”
Devin Ryan, analyst at JMP Securities, said most investors would understand the bank’s position but “there are always gong to be people that will hold their feet to the fire”.
First-quarter earnings were pummeled by almost $1bn of markdowns and credit provisions for loans at its institutional securities division, compared with just $27m of markdowns and loan losses a year ago.
“Over the past two months, we have witnessed more market volatility, uncertainty and anxiety as a result of the devastating Covid-19 [outbreak] than at any time since the financial crisis,” said Mr Gorman, who last week announced he had fully recovered after an earlier diagnosis of coronavirus that was not made public.
Jon Pruzan, chief financial officer, told the Financial Times that Morgan Stanley had “no real credit costs” in its wealth management loan book, which grew 15 per cent year on year to $82.5bn.
“[It] is a very high quality loan book which is virtually all secured, we don’t have credit cards or unsecured lending,” Mr Pruzan said. Just 2 per cent of mortgage holders had asked for forbearance.
The impact of markdowns and provisions at the investment bank and a 14 per cent fall in investment management revenues were cushioned by a boom in trading revenues, though Morgan Stanley’s markets revenues had risen by less than its rivals.
Chris Kotowski, analyst at Oppenheimer, said the trading results were encouraging nonetheless. “If there were going to be a trading wipeout, it would have already happened,” he said.
Mike Mayo, analyst at Wells Fargo, noted the weakness in Morgan Stanley’s investment banking business, where revenues fell 1 per cent year on year, a worse performance than both Bank of America and Goldman Sachs.
Net interest income at Morgan Stanley’s wealth management division, where it makes about 45 per cent of group-wide revenue, fell 21 per cent. “Interest rates near zero will have an impact on us like everyone else,” Mr Pruzan told the FT. “There’ll be significant negative pressure on NII [net interest income] given that rates were cut from 150 basis points to zero.”
Mr Gorman said his guarantee not to cut jobs through the crisis was “one of the easiest decisions I’ve ever made”.
He added: “The worst possible thing you can show in a crisis is a lack of leadership and support for the people, upon whom you depend to get the job done.”