Morgan Stanley looks for Fed pause to drive i-banking revival

Morgan Stanley CEO James Gorman said he is optimistic about a rebound in investment banking activity, perhaps this year, and indicated that the company anticipates no major further employee reductions after a round of layoffs in December 2022.

"I am highly confident that when the [Federal Reserve] pauses, deal activity and underwriting activity will go up," Gorman said during a conference call on fourth-quarter 2022 results. "I would bet the year on that, in fact."

Economic uncertainty and market volatility hammered merger and securities issuance volumes in 2022, driving a crash in investment banking revenue that was partially offset by relatively healthy results from trading operations.

CFO Sharon Yeshaya said the pipeline of deals in investment banking has not weakened, but rather "what's changed is just that movement from the pipeline to realized" deals.

Conditions threw off deal timing but strategic imperatives remain in place, Gorman said. "Sometimes, you've got to ignore timing, but if the market is really volatile, it behooves CEOs, particularly those relatively early in their careers, to be a little cautious, and that's what we're seeing," he said. "That will change."

Gorman, who is also Morgan Stanley's chairman, said he does not anticipate a surge in activity over the first quarter or two of 2023, but he is more confident over the medium term.

"The Fed has moved from 75 to 50, likely to go to 25," he said, referring to the size of Fed interest rate hikes in basis points. "The next stop on the trend line is zero and then eventually they'll start cutting. Not sure they're going to cut this year, but I think there'll be zero increases this year for sure."

"That's the inflection point," the CEO added. "And there's a lot of money sitting around waiting to be put to work."

Gorman said the cuts in December involved about 1,800 employees, and the company recognized severance costs of about $133 million in the fourth quarter. He described the move as overdue "right-sizing" that may or may not represent a "plan B" for lower markets activity.

But "we're not anticipating a plan C," he said. "We're not of the view that we're heading into a dark period, whatever negativity in the world is out there. That's not our house view."

Morgan Stanley's investment banking revenue fell 2% sequentially and 49% from the year prior to $1.25 billion in the 2022 fourth quarter. Trading was down 22% sequentially and 16% from the year prior to $3.59 billion.

Wealth management net revenues increased 8% sequentially and 6% from the year prior to $6.63 billion, beating consensus expectations.

Morgan Stanley's shares were up about 7.0% at around 10:53 a.m. ET on Jan. 17, while the KBW Nasdaq Bank Index was down about 0.4%.