Morgan Stanley profit misses estimate as deals drought extends

The outlook for deals has steadily worsened this year as the U.S. Federal Reserve raised interest rates to tame inflation, clouding the economic growth outlook, while the highs of a record last year drew tough comparisons.

The bank’s investment banking revenue more than halved to $1.3 billion, with declines across the bank’s advisory, equity and fixed income segments.

Global M&A lost ground for the third straight quarter with volumes in the United States plummeting nearly 63% as the rising cost of debt forced companies to delay big buyouts.

Companies have also been delaying plans to go public amid depressed investor sentiment due to turmoil in financial markets triggered by the Ukraine war and rapidly rising borrowing costs.

For a dealmaking rebound, Chief Financial Officer Sharon Yeshaya told Reuters both cost of capital and valuations need to stabilize.

When asked about potential headcount cuts amid the current challenging environment, she said the bank was constantly evaluating its resources.

Morgan Stanley’s net revenue in the quarter fell 12% to $13 billion. The bank reported a profit of $2.49 billion, or $1.47 per share, for the quarter ended Sept. 30, compared with $3.58 billion, or $1.98 per share, a year earlier.

Analysts on average had expected a profit of $1.49 per share and revenues of $13.3 billion, according to Refinitiv IBES data. It was not immediately clear if the reported numbers were comparable with the estimates.

Chairman and Chief Executive James Gorman said the bank’s performance was “resilient and balanced,” adding its wealth management unit helped the firm navigate a difficult environment.

In a note to clients, UBS analysts said the results were solid, but “noisy” as provisions came lower than expected, as well as the tax rate, offsetting negative performance fees.

Morgan Stanley joins rivals JPMorgan Chase and Co and Well Fargo & Co which reported similar hits to their quarterly profit on Friday amid uncertain economic conditions that have led banks to build rainy day funds.

The investment bank increased its provision for credit losses to $35 million from $24 million a year earlier against the backdrop of rising fears of a recession in the United States.

Morgan Stanley’s wealth management business, which tends to generate steady income, was a surprise bright spot, posting a 3% rise in revenue, helped by a 49% jump in net interest income amid rising Federal fund rates.

Its return on tangible equity was at 14.6%, down 5 percentage points from a year earlier. This fell well short of the bank’s long-term goal of 20%, a JPMorgan analyst said. (Reporting by Manya Saini in Bangalore, and Carolina Mandl in New York, additional reporting by Saeed Azhar, in New York; Editing by Arun Koyyur and Nick Zieminski)