Morgan Stanley recorded a $911 million (€760 million) hit from the blow-up last month of Archegos, Bill Hwang’s family office, which caused billions of dollars of losses across global investment banks.
The setback was a blemish on the Wall Street bank’s record set of first-quarter earnings, which were driven by a surge in dealmaking, trading and income from wealth management.
The results statement referred to a $644 million credit loss and $267 million of trading losses relating to “a single prime brokerage client”, which chief executive James Gorman later confirmed was Archegos.
“We are never happy taking a loss, but we have to deal with the facts in reality and get it done,” Mr Gorman said, on a call with analysts. “We even took the extra bit to clear it up by quarter end – we didn’t want it lingering.”
Unscathed
He added the bank’s approach in these crises was to “cauterise bad stuff” and described the almost $1 billion in losses as “necessary and money well spent”.
Rivals slower to exit their positions, such as Nomura and Credit Suisse, fared worse from the collapse of Archegos.
The Swiss bank lost at least $4.7 billion and the Japanese lender about $2 billion, but Goldman Sachs escaped largely unscathed.
“I don’t think we have ever had a loss in the prime brokerage business, it is very well risk-managed and has been for decades now,” Mr Gorman said. “Family offices are not bad per se . . . Let’s not throw the baby out with the bathwater . . . this is a very idiosyncratic event.”
Nevertheless, chief financial officer Jonathan Pruzan said the bank was reviewing the division and would “recalibrate it if and when necessary to do so”. It was also looking at other family office clients to see if there were “suspicious fact patterns” that might indicate whether there are “copycats”, he said.
Mr Pruzan blamed lax family office disclosure rules and said Archegos had not disclosed its highly leveraged stock positions with other banks.
“We had collateral based on a certain set of facts that turned out not to be true,” he added. “It came down to the fact the firm had large positions in names with other banks across the street that we were unaware of.”
Aside from Archegos, Morgan Stanley performed well in the first quarter. It posted an overall net income of $4.1 billion, versus $1.7 billion a year earlier. That translated into earnings per share of $2.19, beating analysts’ expectations for $1.72 a share, according to FactSet.
Surge
Net revenues increased 60 per cent to $15.7 billion off the back of a broad surge across its three divisions. Investment banking rose 128 per cent, largely due to an initial public offering and the Spac boom in equity underwriting. Fixed-income revenue was 44 per cent higher.
“Such a shame we have to talk about” Archegos, in light of the record results from most other business lines, said Evercore analyst Glenn Schorr. He titled his note: “Other Than That, It Was a Great Quarter, Mrs Lincoln.”
The four other major Wall Street banks also reported a blowout quarter in investment banking. Goldman recorded a 73 per cent increase in that business and, on average, those that have already reported saw revenue climb 59 per cent.
Elsewhere, revenues at Morgan Stanley’s wealth and investment management units were up 47 per cent and 90 per cent respectively.
We “delivered record results”, Mr Gorman said in the statement. “The integrated investment bank continues to thrive . . . [and] wealth management brought in record flows of $105 billion. The firm is very well positioned for growth.”
Acquisitive
Mr Gorman has been acquisitive in recent years. Early in 2020, he negotiated the $13 billion acquisition of online brokerage E-Trade and its 5 million customers. That was followed by a $7 billion deal to buy investment manager Eaton Vance, beating out rival JPMorgan and almost doubling its assets under management to $1.2 trillion.
Morgan Stanley’s first quarter follows a buoyant 2020 during which profit surged to a record high despite the havoc caused by the coronavirus pandemic.
The bank’s stock has more than doubled from its pandemic low a year ago and is up 18 per cent this year, outpacing the 11 per cent rise in the S&P 500. – Copyright The Financial Times Limited 2021
