While the big TBTF banks managed to hide much of their ugly balance sheet exposure, and prevent it from hitting the income statement in Q3 as reported previously, while covering up prop trading losses as well as they possibly could, the banks without trillions in deposits were less able to do so: first it was Jefferies, then Goldman posted its worst quarter in years, and now here comes the bank also known as Margin Stanley, which moments ago reported Q3 EPS of $0.34, which even if adjusted for various “one-time” items, at $0.48, not only missed consensus of $0.63 wildly, but it also missed the lowest range of the estimate range ($0.53-$0.70).
Q3 Net Income, on an apples to apples basis ex DVA, was a paltry $740 million, nearly $1 billion lower than Q2, and down 44% from the $1.4 billion a year ago.
The driver: a collapse in revenue, which at $7.3 billion non-GAAP and $7.8 billion as reported, was the lowest top-line print since 2012.
Not surprisingly, the biggest pain was again in Institutional Securities, as trading and liquidity ground to a halt in a quarter in which the CBOE literally had no idea what the VIX was for half an hour on August 24. The culprit, as usual, FICC: $583MM, which reported revenues down from $997MM. This was somewhat offset by Equity Sales: $1.8 billion, which were unchanged froim a year ago.
Overall, Investment Banking at $1.3 billion was down 15% from a year ago, while Trading plunged 17% to $2 billion.
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Curiously, the biggest reason for the tumble had nothing to do with trading and everything to do with Investment Management, where revenue crashed 59% to $274 million. According to the company, “net revenues of $274 million decreased from $667 million in the prior year primarily reflecting the reversal of previously accrued carried interest associated with the Asia private equity business and lower results in the Traditional Asset Management business.”
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In other words, the Chinese trading bubble burst.
Still, according to CEO Jim Gorman, it was all volatility’s fault:
“The volatility in global markets in the third quarter led to a difficult environment, impacting in particular our Fixed Income business and our Asia Merchant Banking business. The Firm benefited from the stability of the Wealth Management business, our ongoing leadership in Equities and the continued strength of our Investment Banking franchise. Our business model provides a steady foundation for the Firm as we navigate these challenging markets and focus intensely on addressing areas of underperformance.”
Oddly enough, a year ago Morgan Stanley blamed the lack of volatility for a “difficult environment.” Thank you Fed for habituating all “traders” to only perform to their maximum when everything is just right.
End result: the bankers will eat it – “compensation expense of $3.4 billion decreased from $4.2 billion a year ago primarily driven by lower revenues” the bulk of which came from institutional sales: “Compensation expense of $1.3 billion decreased from $1.8 billion a year ago on lower revenues” and the abovementioned Chinese blow up: “Compensation expense for the current quarter of $95 million decreased from $253 million a year ago, principally due to a decrease in deferred compensation associated with carried interest.”
Bottom line: more wage deflation is coming.
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