Don't Pop the Champagne Yet for Morgan Stanley

The institutional segment should normalize lower. Similar to other capital market-related firms that benefited in the first quarter from asset price volatility and increased investor engagement, institutional trading revenue was the standout performer, increasing 26% from the previous year and 64% sequentially to $4.4 billion. $4.4 billion is approximately 40% higher than the trailing three-year average, and the 35% operating margin in the institutional group compares with a three-year average of about 28%. It’s clear that this profitability level isn’t sustainable.

The wealth management segment was a bit mixed. Its pretax operating margin is breaking new ground at 26.5%, but client assets and net interest income slightly dipped sequentially. The small decrease in client assets may be mainly due to choppy asset prices in the quarter, but there could be some fundamental changes in net interest income. Net interest income may be affected by Morgan Stanley’s deposit base becoming strained and having to stretch for higher cost funding sources.

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