NEW YORK--Morgan Stanley reported a drop in quarterly profit Thursday, hit by lower market activity amid global trade tensions and expectations for U.S. interest rate cuts.
It was the last big U.S. bank to report earnings in a quarter that exposed weaknesses in Wall Street's investment bank and trading businesses. But Morgan Stanley executives downplayed the toll rate cuts could have on profitability and highlighted growth in the bank's wealth management unit.
The wealth business, which contributes 44% of Morgan Stanley's revenue, rose 1.9% to $4.40 billion from a year earlier. The unit benefited both from higher stock prices and more lending to customers. That more than offset the effects of lower interest rates.
The bank reported pre-tax profit margin of 28.2% for the business, just above the high end of its 26% to 28% target. Chief Executive Officer James Gorman placed a huge bet on wealth manager nearly a decade ago as a source of stable revenue.
Lower interest rates can squeeze a bank's net interest income, or the difference between what it pays for deposits and earns from loans. But Morgan Stanley officials said they expected net interest income for the third quarter to remain in line with 2018 at roughly $1.1 billion.
"What drives the numbers is not just net interest income," said Gorman on a call with analysts. "We have some other businesses over here and some of these businesses are chugging along quite nicely."
Still, Morgan Stanley's sales and trading revenue fell 12% in the second quarter, with both bond and equity trading seeing a dip. By comparison, main rival Goldman Sachs Group Inc on Tuesday reported a drop in revenue from bond trading but higher equities trading.
Concerns about up to three rate cuts this year weighed on bank earnings throughout the week and caused rival JPMorgan Chase & Co to lower its projected net interest margin for the year. Morgan Stanley does not report this metric, but Chief Financial Officer Jonathan Pruzan said interest rate cuts would crimp margins in the wealth business. What it would do to the rest of the bank's business, he said, is less clear.
"What it does to our fixed income business and our equity business is really a function of how people interpret the cut," Pruzan said. "If it improves people's view of the world that we're going to extend the economic expansion and people want to press that view in the equity markets, it could ... help."
