Morgan Stanley chief executive officer James Gorman told shareholders he "can promise" the bank will miss its medium-term financial targets again in the current quarter, as the economic shutdown caused by the novel coronavirus will continue to upend the global and US economy.
"We're in a wild period," Gorman said on a call with analysts, noting economists predict gross domestic product will fall 30 per cent this quarter. "A CEO who stands by their short-term targets that were set right before this virus hit, I don't know what planet they're on."
Morgan Stanley chief James Gorman has promised shareholders the bank will miss its targets in the current quarter. Credit:Bloomberg
The last of the big US banks to report first-quarter earnings, Morgan Stanley said its profit slumped by 30 per cent and it missed new return targets and cost-cutting goals.
The nation's largest lenders reported sharp declines in profit and higher reserves this week, as they anticipated that the millions people unemployed as a result of the coronavirus will likely struggle to pay loans and credit card bills.
Morgan Stanley, which does not have a significant consumer loan business, fared well by comparison.
After years of steady growth targets, the bank boosted goals in January, saying it could reach a return on tangible common equity (ROTCE) of between 13 per cent and 15 per cent in two years. It also set its efficiency ratio at 70 per cent to 72 per cent and pre-tax profit margin for the wealth management business between 28 per cent and 30 per cent.
It was far from all three in the first quarter, reporting a 9.7 per cent ROTCE, a 77 per cent efficiency ratio and a 26.1 per cent pre-tax margin in wealth. Gorman said that the bank can "definitely" beat some of those targets by the end of 2021 but said they were set before the downturn.
"It would be irresponsible of me to recommit to those targets on this call," said Gorman, who recently recovered from the illness caused by the coronavirus. "Those targets are not achievable in the second quarter. They weren’t achievable in the first quarter."
Targets aside, the bank's trading revenue surged 30 per cent in the quarter ended March 31, boosted by high market volatility last month. The returns were led by a 29 per cent jump in bond trading and a 20 per cent rise in equities trading.
The robust trading mirrored a similar showings by rivals Goldman Sachs and JPMorgan, both of which clocked double-digit growth in equities and bond trading.
However, revenue at Morgan Stanley's wealth management unit, which contributes roughly half of its total revenue, fell 8 per cent to $US4.04 billion this quarter, in part because investments associated with employee compensation lost value during the market downturn. These contributed to a roughly $US500 million decline in wealth revenue.
It would be irresponsible of me to recommit to those targets on this call.
Advisory revenue fell 11 per cent as deal-making took a beating in the quarter, with businesses bracing for a massive slowdown in the coming months.
Morgan Stanley's $US13 billion ($20.6 billion) deal to buy discount brokerage E*Trade Financial also coincided with the spread of the coronavirus, forcing management to justify the buyout to investors. The company said it was on track to close the deal in the fourth quarter.
Investment management revenue at Morgan Stanley fell 14 per cent to $US692 million, hurt by valuation mark downs on its investment portfolio and lower interest on loans.
The bank said earnings attributable to common shareholders fell to $US1.59 billion, or $US1.01 per share, in the first quarter. Analysts had expected $US1.14 per share, according to IBES data from Refinitiv.
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