Morgan Stanley reported wealth management revenues of $4.6 billion in the second quarter, up 6% from a year ago and 16% sequentially, exceeding analysts’ estimates by 14%. That could be attributed to growth in advisor productivity, with the firm reporting average annualized revenues per FA of $1.2 million, up 16% sequentially and 8% year over year.
Net income in wealth was down slightly from last quarter and 10% year over year, given rock-bottom interest rates and market difficulties, to $853 million.
Its advisor head count continues to fall but far more slowly than last year, and company executives noted that the acquisitions of E*Trade and Solium Capital are producing tangible results.
On an earnings call, CFO Jonathan Pruzan said “net recruiting has materially improved.” Company officials said that head count fell by 39 advisors during the quarter to 15,399, after dropping 32 in the first quarter.
Morgan Stanley CEO James Gorman said that despite the low rate environment and the impact of integrating E*Trade, the wealth unit’s net interest margin, which fell to 24.4%, 230 basis points above analysts’ expectations, from 26% sequentially and 28% year over year, outperformed the company’s expectations, demonstrating that “clients continue to consolidate their assets with us.”
Client assets in the wealth unit rose 11% sequentially and 4% on a year-over-year basis to $2.661 trillion, while fee-based assets rose 9% sequentially and 7% from the prior year to $1.2 trillion.
“During the last crisis, we were losing on the margin,” Gorman said. “With this crisis, the reverse is happening. We are attracting flows, talent, functionality. It all bodes well for the future of the wealth business.”
Pruzan said that underlying growth drivers in wealth remain strong.
“On the heels of the technology and risk management investments we have made…we increased retail asset capture and retention, and lending penetration with existing clients.”
In response to several analysts’ questions, Gorman said that E*Trade contributed “hundreds of thousands of real accounts, with billions of net new assets and deposits” during COVID-19. “This is not kid money,” he said. “Strong digital across wealth management is going to be critical.”
He added that the company won’t delve deeply into its plans for E*Trade’s tiny RIA custody business until early next year but asked, “Why not take the opportunity to pursue it? While the elephant is the core advisory business, we will take a look at the RIA stuff” once the acquisition closes.
In addition, he touted the E*Trade deal and the company’s 2018 acquisition of Canada’s Solium Capital, the nation’s stock plan provider, as rounding out the company’s strategy to build out the wealth business first by focusing on the most profitable segment of that industry, the financial advisory business, and then improving its offerings in the second- and third-most profitable areas of wealth, the workplace and digital segments.
That unit continues to grow, with the addition of 180 new corporate clients in 2020 and 525 since the acquisition was announced.
Overall earnings for Morgan Stanley rose to a record $3.2 billion, or $1.96 per share, due largely to outsize gains in the institutional securities business, 84 cents above Wall Street consensus expectations.
Goldman Sachs analysts Richard Ramsden and James Yaro reiterated their Buy rating on the firm, calling the results “a well-rounded revenue beat.”
Wells Fargo Securities senior bank analyst Mike Mayo was less enthusiastic, maintaining his Equal Rate rating in a note released Thursday morning. He lauded the wealth unit’s net interest margin performance, attributing it to “stickier deposits,” and its good noncompensation expense controls. However, he questioned whether the company could maintain revenue growth in the future without a similar contribution from capital markets.
The company’s shares rose over 4% by midday trading to $53.43.