Morgan Stanley just became the latest bank to announce a major tax hit to Q4 earnings, while beating on both the top-line and adjusted EPS (net of tax charge), even as debt and trading revenues tumbled, offset by rising investment banking fees.
In 4Q, Morgan Stanley recorded a net discrete tax provision of $990MM, including $1.2BN provision due to tax law, primarily from remeasuring deferred tax assets (DTA), partially offset by $168MM benefit for remeasuring reserves and related interest relating to status of multi-year IRS tax examinations.
Tax charge aside, James Gorman’s bank announced that in Q4 it made $9.5BN in revenue, up from $9.02BN a year ago and above the $9.24BN expected, earning $686 million, or $0.29 GAAP EPS, a number which however rose to $0.84 when adding back the $1 billion tax provision, above the consensus estimate of $0.77. Full year 2017 revenue was $37.9BN, up 10% from the previous year.
Just like Goldman, the bank reported strong Investment banking revenue, which rose to $1.55BN, up 12% from a year ago and beating estimates of $1.3BN. However, and just like Goldman again, the problem was the company’s FICC, or mostly fixed-income trading, a former problem division that Morgan Stanley sharply cut two years ago in an effort to improve profitability and focus, where revenue tumbled 45%, failing for the first time in nearly two years to clear a $1 billion bar set by CEO James Gorman: FICC was only $808MM, below the $1.03BN estimate, and down from $1.5BN a year ago. By comparison, Goldman was down 50% in FICC, plunging to the lowest level since the financial crisis.
Overall trading revenue was $2.246BN, a sharp 19% lower than the $2.789 reported one year ago this time.
Unlike Goldman, however, and some of its peers, Morgan Stanley held its ground in stock-trading, where it remains Wall Street’s market share leader: equities sales & trading revenue dipped to $1.92b, however above the ext. $1.89b
Also unlike Goldman, which remains reliant on trading, Morgan Stanley’s key contributor remains its giant retail brokerage, which oversees $2.4 trillion for some 3.5 million American households. Revenue in that business rose 10% to $4.4 billion. As the WSJ notes, the division’s profit margin, once in the high single digits before Mr. Gorman embarked on a multiyear turnaround that included the purchase of Smith Barney, ticked up a percentage point to 26%.
