Here is a statistic you might have missed. Morgan Stanley’s first-quarter results, announced last week for the year to March 31, featured the bank’s third-best quarter from Asia – ever.
That’s right. In this dismal environment, with capital markets activity stymied by rising rates, inflation and feeble risk tolerance, a US investment bank delivered a quarter of earnings that has only ever been beaten twice, through years and years of boom markets.
Your next question: how?
Morgan Stanley breaks down revenues by region – Asia delivered $1.989 billion in the first quarter, up 40% on the fourth quarter of 2022 – but doesn’t go any further from that. The earnings call did, however, give us some insights into what went right.
Going so right
Sharon Yeshaya, chief financial officer, referred to “strength in areas of both fixed income and equity, aided by the policy dynamics in Japan and the China reopening.”
Chief executive James Gorman then referred to growth in private banking in Asia, and then Yeshaya put more meat on the bones following an incredulous question from Wells Fargo analyst Mike Mayo (“What is going so right in Asia that it’s your third-best quarter in an environment like this?”)
The engine rooms of the bank’s profit were not what we think of as classic investment banking
Yeshaya then referred again to China reopening, “supporting us from the equities side and perspective in terms of client engagement.”
And she referenced the Japan franchise again.
“In an environment where interest rate dynamics change, such as what’s going on within Japan, that’s certainly helped us from the macro perspective… within fixed income.”
The next bit is worth quoting in full.
“I think that where that’s very important and critical is that it speaks to the global perspective and it speaks to our global franchise,” she said. “Why that is important when you think about investment management – and I will tie the two together [Mayo had also asked about investment management] – is that you have to invest more broadly to be able to create an environment of diversification.
“And so, Asia might be asleep. Japan, for example, could be asleep for many years. And all of a sudden, central bank activity picks up, and you’re there to support your clients with that global franchise.”
Business machine
There are a number of interesting takeaways from all this.
The first is that the engine rooms of the bank’s profit were not what we think of as classic investment banking: deals, whether in ECM, DCM or advisory.
In that respect, Morgan Stanley is doing fine, but it is just not a deal-making environment yet.
Bonds are back, but high-yield, where all the fees are, is still moribund.
Indonesia is the only place with a really active field of IPOs, but they are heavily domestic deals that don’t really fit international bookrunners.
There is a ton of dry powder in private equity waiting to be deployed in acquisitions, but still not a boom market by any means.
Instead, Morgan Stanley is making its fortune in sales and trading, and in private banking. It would appear that Archegos did not dent the bank’s prime brokerage operations in any lasting fashion: that business is a machine.
And as for private banking, Gorman addressed it directly. In saying he had no appetite for private banking in Europe – one of the first things he did as CEO was to sell that business to Credit Suisse – he added: “Much more interested in the US and Asia, and some in LatAm.”
In the US, private banking is a powerful force, “an asset-gathering monster,” as Gorman put it. Asia isn’t there yet, but at least it is bracketed in the same conversation.
“We know what we’ve got here [globally] and it’s a killer machine," Gorman said. "Asia is growing nicely."
And, later: “That’s how we think about it: Asia, more interesting; Europe, not interesting; LatAm, a little bit interesting; and US, definitely interesting.”
This represents a change over the last 10 years or so. Morgan Stanley always had private banking operations in this region to serve clients who needed them, but it was something of a rounding error then. Not anymore.
Win-win
So that was the product side. Geographically, Yeshaya’s comments were interesting, because she suggested something that is not common practice in investment banking: staying the course through dormant periods of business to be ready for the boom times.
Clearly, it seems that China's reopening is already working out well for the bank, but Japan appears to be booming.
In that market, the bank is helped by its joint venture with MUFG, which has delivered well for years despite widespread doubt during its early days. The definition of a win-win, and perhaps the most positive deal to emerge from the global financial crisis, MUFG’s investment in Morgan Stanley not only saved the US bank but provided the Japanese lender with a truly vital lift to profits that elevates its financial performance relative to its peers. And it created this investment banking double act that marries the US house’s international brains with the domestic connections and distributions of the Japanese.
Still, even if we can explain where the momentum came from, it is a remarkable result, and highly unexpected. It bodes well for the money Morgan Stanley can make when there are deals to do again.
