2019 has been an uncomfortable year for investment banks. For Wall Street giant Morgan Stanley, things have been going south. Its revenues dipped in the first half of the year. Now their finance boss is pointing to interest rates as the bank meets a similar fate in the second half of 2019.
What is the rate environment like?
According to Morgan Stanley’s John Pruzan, the “dramatically different” interest rates will lead to a fall in the company’s net interest income. Pruzan was speaking at New York’s Barclays financial conference on Wednesday when he indicated that client activity experienced a dip in the equities trading sections. He noted that this low activity was primarily because of uncertainty about the global economy, including concerns about trade wars.
He also said that foreign exchange levels are significantly lower. The same slowdown is being experienced in the investment banking sector as well as new listings have also become slower compared to 2018. On the contrary, the credit business of the company is doing relatively well.
Bad guidance for the bank?
Pruzan avoided giving specific numbers and didn’t foretell a percentage fall in their net interest income for Q3 2019. However, his comments suggest that all is not well for the bank, and its results could be worse than its peer JP Morgan. Yesterday, their CEO Jamie Dimon made a shocking revelation that their investment banking revenue remained flat while trading revenues experience a 10% year-on-year decline.
Morgan Stanley’s performance in the first half wasn’t very inspiring. Its investment banking revenue fell by 17% for six months ending June 2019. During the same period, their trading revenue was down by 13%. However, Pruzan was quick to suggest that the bank will not be as badly affected as its peers because of declining net interest income. He said that interest income is only 10% of the bank’s total income.
Interestingly, he also highlighted that the bank’s wealth division would see a higher number of prepayments from clients who will want to remove loans with a higher interest rate quickly. This will also hit their net interest income. He said,
“The shape of the (interest rate) curve and absolute rates are dramatically different than where they were back then (at third-quarter earnings). Given where rates are, clearly pre-payment amortization is going to have an impact.”
The real impact of the situation can only be assessed when the bank releases its Q3 financial reports.