Rising Rates a Tailwind for Morgan Stanley

Wealth management remained a solid contributor, with record net revenue of $4 billion. However, operating margins for the quarter ticked down to 22% from 23% because of an increase in noncompensation expenses to $876 million, approximately 10% higher than recent quarters. The company cited tax reporting issues, but we wonder if some of it is related to increased costs for implementing the Department of Labor’s fiduciary rule. We believe that these costs may pressure the wealth management segment’s operating margin.

One area of disappointment in the quarter was the company’s net interest income, which decreased $120 million sequentially and $154 million from the previous year. The swing was from a negative $220 million change in the institutional securities business. This may purely have been a timing issue, with short-term funding rates for securities increasing ahead of the Federal Reserve’s widely anticipated December rate increase. The more important trajectory in wealth management net interest income was still intact, though, increasing $99 million, or 11%, sequentially.

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