Morgan Stanley Earnings: Half of Record Inflows Tied to IPOs

Morgan Stanley (MS) reported third quarter earnings of $3.03 a share on Wednesday, Oct. 14, on net revenues of $20.3 billion, ahead of LSEG estimates of $2.91 and $19.95 billion, according to CNBC. The figure that stands out in its earnings release is a record $232 billion in Wealth Management net new assets. The same release adds that "just over half" of that money was "associated with IPO-related flows." In the same quarter, the firm's own equity underwriting revenue fell on what it called "lower IPOs." The IPO wave helped the wealth business far more than it helped the investment bank.

Morgan Stanley Stock Slips Despite the Beat

Morgan Stanley stock traded at $181.67 at 9:35 a.m. ET on Wednesday, shortly after the open, according to Yahoo Finance data, down about 2.7% from Tuesday's close of $186.64, by TradeFlock's estimate. CNBC had reported the shares down about 2% before the bell and quoted Wells Fargo analyst Mike Mayo calling the results "good, but not great." Compared with the second quarter, net revenues fell 5% and earnings per share fell from $3.46 to $3.03, and return on tangible common equity slipped to 22.6% from 26.6%, according to the release.

How Much of the Record Came From IPOs

Net new assets, the money clients brought in minus what they took out, reached $232.4 billion, up from $148.1 billion in the second quarter and $81.0 billion a year earlier, according to the financial supplement. If just over half came from IPO-related flows, the remainder was at most about $116 billion, by TradeFlock's estimate, since the firm did not disclose the exact IPO amount. That is still up to about 43% above the entire year-earlier total, so the underlying business grew even without the listings. But the IPO share is the kind of inflow that depends on a busy listings calendar.

Those flows run through the workplace channel, where Morgan Stanley administers stock plans for companies and their employees. When a private client lists, employee equity can become public assets on the platform. Bloomberg reported that the firm's bankers worked on some of the year's biggest listings, including SpaceX, which it said is a customer of the workplace business. The supplement shows stock plan unvested public assets fell 3% from the second quarter to $638 billion, though they were up 19% from a year earlier, and the number of participants rose to 6.7 million. Those unvested holdings are the pipeline: as shares vest, they can become client assets. Fee-based flows, which show money moving into advisory accounts, more than doubled to $80.5 billion, and the release says they included a new corporate retirement mandate.

Where the IPO Boom Did Not Pay

Investment banking revenue in Institutional Securities rose only 2% to $2.16 billion, about $110 million below expectations, according to CNBC. Within that, equity underwriting revenue fell to $525 million from $652 million a year earlier, down about 20%, by TradeFlock's estimate, which the release attributed to "lower IPOs and blocks, partially offset by higher follow-on offerings." Advisory revenue rose to $887 million from $684 million. Fixed income trading fell 7% to $2.01 billion.

Equity trading carried the quarter. Its revenue rose 41% to $5.8 billion, about $909 million above the StreetAccount estimate, CNBC reported. In Investment Management, performance-based income swung to a loss of $106 million from a gain of $117 million a year earlier, which the release tied to the reversal of accrued carried interest, mainly in one private fund.

What to Watch in Morgan Stanley Wealth Management

Wealth Management still posted record net revenues of $9.1 billion and a pre-tax margin of 30.4%. Deposits rose to $465 billion from $436 billion, but the period-end annualized cost of those deposits rose to 2.85% from 2.60%, according to the supplement. The firm bought back $1.54 billion of stock in the quarter at an average price of $212.74. The 9:35 a.m. price was about 15% below that average, by TradeFlock's estimate. The board declared a $1.15 quarterly dividend payable Nov. 13.

The question for investors is how much of the $232 billion repeats. TradeFlock has tracked the listings pipeline, from Goldman's fintech IPO filings to the funding wave around the SpaceX IPO, as well as Bank of America's warning on third quarter banking fees. If listings slow, the IPO share of Morgan Stanley's inflows will shrink with them, and the roughly $116 billion that did not come from listings becomes the better guide to underlying growth, by TradeFlock's reading.

Cover photo: The New York City Skyline at Dusk looking West by Bruce Emmerling / Wikimedia Commons, CC BY-SA 4.0 (cropped and resized; the original is black and white).