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Morgan Stanley hit a $ 911 million hit after the outbreak of Archegos, the family office of Bill Hwang, last month, which caused billions of dollars in losses to global investment banks.
The downturn led to an imperfection in the Wall Street bank’s first-quarter earnings record set, driven by increased hiring, trade and wealth management revenue.
The income statement referred to a $ 644 million credit loss and $ 267 million in business losses related to “a primary brokerage client,” which CEO James Gorman later confirmed was Archegos.
“We’re never happy to lose, but we have to deal with the facts of reality and get it done,” Gorman said in a call with analysts. “We even took advantage of the extra amount to clear it up in the quarterfinals; we didn’t want it to persist.”
He added that the bank’s focus on these crises was to “cauterize bad things” and described the nearly $ 1 billion in losses as “necessary and money well spent.”
Rivals came out of their positions more slowly, such as Nomura and Credit Suisse, which were worse off 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 unscathed.
“I don’t think we’ve ever had losses in the core brokerage business, it’s very well managed by risk and has been for decades,” Gorman said. “Family offices are not bad in themselves. . . We don’t throw the baby with the bath water. . . it is a very idiosyncratic event ”.
However, CFO John Pruzan said the bank was reviewing the division and would “recalibrate it if necessary and when necessary”. Other customers of the family offices were also examined to see if there were “patterns of suspicious facts” that could indicate if there were “imitators,” he said.
Pruzan blamed the disclosure rules of lax family offices and said Archegos had not disclosed its highly leveraged securities positions with other banks.
“We had guarantees based on a certain set of facts that turned out not to be true,” he added. “It resulted in the company having big positions in names with other street banks we didn’t know about.”
Aside from Archegos, Morgan Stanley performed well in the first quarter. It earned an overall net profit of $ 4.1 billion, up from $ 1.7 billion the previous year. This translated into earnings per share of $ 2.19, exceeding analysts ’expectations by $ 1.72 per share, according to FactSet.
Net income increased 60% to $ 15.7 billion, thanks to a broad increase in its three divisions. Investment banking increased 128%, mainly due to an initial public offering and the Spac boom in equity subscription. Fixed income was 44% higher.
“It’s a shame to talk about it,” Archegos said, in light of the record results of most other business lines, said Evercore analyst Glenn Schorr. He headlined his note: “Other than that, it was a great neighborhood, Mrs. Lincoln.”
The other four major Wall Street banks also reported that explosion quarter in investment banking. Goldman recorded a 73% increase in this business and, on average, those who reported it have increased revenue by 59%.
Elsewhere, revenues from Morgan Stanley’s wealth and investment management units increased 47% and 90%, respectively.
“We got record results,” Gorman said in the statement. “The integrated investment bank continues to thrive. . .[and]wealth management generated record flows of $ 105 billion. The company is very well positioned for growth.
Gorman has been acquired in recent years. In early 2020 it negotiated the acquisition of $ 13 billion online brokerage ETrade and its 5 million customers. This was followed by a $ 7 billion deal to buy investment manager Eaton Vance, outperforming rival JPMorgan and nearly doubling its managed assets to $ 1.2 million.
Morgan Stanley’s first quarter comes from the 2020 boom during which profit rose to one record high despite the ravages caused by the coronavirus pandemic.
The bank’s shares more than doubled its low pandemics a year ago and rose 18% this year, surpassing the 11% increase in the S&P 500.
Additional reports by Laura Noonan
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