Morgan Stanley beats on top and bottom lines, equity business rises 24%

Yahoo Finance's Brian Cheung, Julie Hyman, and Brian Sozzi break down Morgan Stanley's Q3 earnings report.

Video Transcript

BRIAN CHEUNG: Now with Morgan Stanley also reported earnings before the bell. This is, I promise, the last one. They had $14.75 billion in revenue on the top line, on the bottom line $2.04 of earnings per share, also beating the Street's estimates on both measures.

Again, that $2.04 is actually adjusting for the E-Trade and the Eaton Vance acquisition, which they've been working through. Shares are up about 2% in pre-market trading. A lot of this, again, the big story, M&A they had a boom that really drove record advisory revenues of $7.5 billion. And also consider that their equity business knocked out of the park, up 24% from a year ago. That helped make up for a 16% decline in their income from their fixed income business as well.

So that's the wrap up for these large banks. The only one that we're waiting for is Goldman Sachs which will come out tomorrow morning. So we'll stay in New York for that picture once we get that pre market. But, again, big banks kind of rounding out the picture here. Big story, investment banks are the ones driving the train. We'll see if loan growth in their consumer businesses can pick up in the quarters to come.

BRIAN SOZZI: Brian, pretty soon your tour might just involve you hopping in a Tesla and going right to Florida with all these financial institutions vacating from New York to escape higher taxes. But look, let's just lock in on Bank of America here. This is another quarter where you get the sense Bank of America and CEO Brian Moynihan, this is a company on autopilot. Another very strong quarter like you mentioned in investment banking. But also another big bank calling out strength in debit and credit card sales.

BRIAN CHEUNG: Yeah, and this is a big story when it comes to loan growth. It is true that when you unpack the loan growth pipeline for all of these banks that have consumer facing businesses. Morgan Stanley is not one of them. I'm really thinking about JPMorgan Chase yesterday and then the other of the big three megas today. That's Citi, Wells Fargo, and Bank of America.

Really, their loan pipelines, when you take a look at things like credit cards or home loans-- well, home loans have definitely been increasing. But credit cards have not been increasing. But all the commentary that we've gotten from a lot of these bank executives have been, this is probably going to be the last quarter where you'll see loan pipelines be flat and that you can really start to see some of that uptick in the quarters to come.

And this is because of the healthy consumer. When you consider that the reason why loan pipelines have been kind of flat across these consumer facing businesses, it's because of the fact that they've been paying down their existing debt. So, basically, the CARES Act with the stimulus checks, the unemployment checks, that's allowed a lot of these households to actually increase the amount of savings on an average basis that they have.

So they've been using that to pay down any sort of outstanding bills that they have. For the banks, that means smaller loan pipelines. But all signs, when you take a look at inflation, for example. The demand is obviously there to go out there and consume not just goods but also services through the reopening of this economy. That's a big reason why Bank of America and also JPMorgan Chase, you heard their CFO yesterday kind of guiding on the idea of more optimism for loan growth in the fourth quarter of this year and then maybe in the beginning parts of next year.

So I think that will be very interesting story as the big banks try to shift the story from we're leaning on our investment banking and our ability to trade in the markets and do advisory for M&A towards their bread and butter which is actually borrowing on the short term and then lending on the long term.

JULIE HYMAN: And Brian, one more thing that that sort of caught my eye when it comes to Bank of America and the banks generally, you know, especially given the minutes from the last Fed meeting that we got yesterday. They gave us sort of more granularity around the plan to begin tapering bond purchases, a rising rate environment and what that's going to mean for the banks.

Bank of America, its net interest income improved, and, I think, improved to better than the company had forecast. And it looks like that they put excess deposits into treasuries and other securities instead of keeping them on deposit at the Fed which helped them gain a little bit more juice. What does that tell us if anything about what's going to happen with the banks once rates start to rise more?

BRIAN CHEUNG: Oh, my gosh. I absolutely love this question. Because it just speaks to the nuances of everything that I love which is the banking industry and then the Federal Reserve. But when you're talking about the liquidity that all of these banks have, just take a look at the total assets for all of these banks, right? They have ballooned over the course of the crisis. And that makes sense. Because the amount of money printing that the Federal Reserve did through the depths of the pandemic and is continuing to do with QE still happening has really expanded the belly, if you will, of all these banks.

So what do they do with that? Well, a lot of them are just holding onto that in liquid assets, right? You're just holding on to that in the form of cash that you're parking at the central bank. You might be holding it in US treasuries, maybe other liquid securities like mortgage-backed securities. But you're not doing too much of that. You're not deploying too much of that liquidity. One reason is because, well, during the depths of the pandemic, you weren't really sure what was going to happen.

So you're holding onto that liquidity knowing that there's the possibility you might have to use that to absorb any sort of possible shocks that could come from people not being able to repay their loans or for going into full default. But the question now is that these banks who are still holding onto this liquidity are in a market environment where they have the ability to swap that out for higher yielding assets, which they might want to do in a rising rate environment.

The Fed is still keeping interest rates in the short term at near-zero. But you're seeing certain parts of the curve increase to a point where as the Fed starts to signal, it could begin raising rates as soon as the later part of next year, whether or not that would push them to try to swap out some of that liquidity. Now, again, the CFOs that I've heard on a lot of these media calls over the course of today and yesterday have mentioned that they have the ability to deploy that liquidity but a few caveats.

First of all, they want to make sure that they can return liquidity to shareholders if they wanted to. Because, again, share buybacks and other types of dividends have been a really big story for these value companies, who they realize that's the big kind of proposition, value proposition to people buying their stock. But then secondly, there are requirements that these types of companies face that no other industry faces when it comes to the Federal Reserve, the OCC, the FDIC having liquidity requirements that require them to hold a minimum balance not just at the Federal Reserve but also on their balance sheet to make sure that they can have the capital to absorb any possible losses if things do get worse in the future.

So it's a little bit of a moving parts here. A lot of banks would probably say we love to deploy this liquidity, but we have regulatory reasons to not to, and we also have shareholder reasons not to. So all that nuance baked in right there. I'm sure, hopefully, we didn't lose too many viewers there. But very interesting to see how the banks play that out in the quarters to come.

JULIE HYMAN: It's important stuff. And I'm glad that you took us through it there. Obviously, a lot of sort of competing constituencies as well. Also, for some reason, I had Elizabeth Warren's voice somewhere over here as you were talking about that in the capital requirements of the banks, which she says in some cases are not stringent enough.

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