Morgan Stanley's second-quarter profit slumped 30 per cent, falling short of analysts' estimates for the first time in nine quarters, as its investment banking business suffered from a slump in global dealmaking.
But Morgan Stanley chief executive James Gorman told analysts that the current environment is not as bad as the 2008 financial crisis, and stressed his bank was in good shape.
“I think it's important to say, though, it is not 2008 … this is a different type of financial stress in the system, and frankly the banking sector is much stronger,” he said.
While he warned that the US might head into some form of recession, it is unlikely to be “deep and dramatic.”
Morgan Stanley's investment banking revenue plunged 55 per cent in the second quarter, mirroring a similar drop at its larger Wall Street rival JP Morgan Chase and eclipsing an 8 per cent rise in trading revenue.
The Fed's aggressive actions to contain runaway inflation have rattled global financial markets, curbing companies' appetite for deals, while also slowing their efforts to raise cash through stock and debt offerings.
The turmoil has upended a lucrative revenue stream for investment banks, whose results are also facing tough comparisons with the second quarter of last year when accommodative monetary policies led to record levels of deals.
Banks could see further pain down the road, as the latest report on Wednesday showed inflation had accelerated again in June, probably putting more pressure on the Fed to raise rates.
“Larger transactional M&A will really be dependent on just price discovery and how markets open up over the course of the next six months,” Morgan Stanley's chief financial officer Sharon Yeshaya said.
The bank's wealth management business, which is seen as a durable source of revenue, did little in the quarter to offset the slump in dealmaking. Revenue from the business dipped 6 per cent and contributed to a 11 per cent slide in Morgan Stanley's net revenue.
Morgan Stanley's equity and fixed income underwriting revenue plunged 86 per cent and 49 per cent, respectively.
Overall, the bank reported a profit of $2.4 billion, or $1.39 per share, for the quarter ended June 30, compared with $3.4bn, or $1.85 per share, a year earlier.
Analysts, on average, had expected a profit of $1.53 per share, according to data from Refinitiv, although they were sanguine about the result which came during a difficult market environment.
“We should be breathing a sigh of relief as these are the kinds of markets in which historically things might go way off the rails for large investment banks,” said Oppenheimer in a research note.
The bank also said it had recorded a $200 million expense related to a regulatory matter tied to the use of unapproved personal devices and record-keeping requirements.
Provision for credit losses this quarter was $101m, up from $73m a year earlier.
Morgan Stanley's shares were down 1.5 per cent at $73.84 in morning trade. They have plunged nearly 24 per cent so far this year.