morgan stanley stock
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Charles Schwab, Raymond James Financial
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Asset management companies such as Co. and others fell on Wednesday on concerns that rising interest rates are hurting their results while also reducing client assets.
Morgan Stanley (ticker: MS) shares fell 6.8% after the company reported earnings that beat analysts’ expectations, but still showed weakness in its investment banking and wealth management divisions. Raymond James Financial (RJF) fell 4.6% and Charles Schwab (SCHW) fell 3.4%.
The sell-off came amid a broader decline in the stock market and even as some asset management firms, including Schwab and Morgan Stanley, reported profits this week that beat Wall Street expectations. “On days when the market drops significantly and interest rates rise, that’s the backdrop for wealth management stocks to sell,” said Devin Ryan, an analyst at JMP Securities. “It’s a double whammy for business.”
Market declines will inevitably lead to a decline in these companies’ assets under management, which will depress fee-based revenues. Additionally, high interest rates are putting pressure on the profits of some asset management companies. That’s because interest payments have risen and customers are moving uninvested cash out of low-interest bank accounts and into higher-interest options such as money market funds, which currently yield more than 5%. The process, known as cash sorting, has been a headwind for Schwab and a cause for concern for investors this year.
“People are paying attention to the interest rate trends of these companies,” Ryan said.
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Share prices for some asset managers have also come under pressure from concerns about other areas of their business, such as investment banking, where M&A activity has slumped. “That’s a disaster there,” says William Blair analyst Jeff Schmidt.
For example, Morgan Stanley’s investment banking division’s revenue fell 27% year over year. The company’s wealth management division reported a 5% increase in revenue, but net new assets of just $36 billion, well below the rate seen in recent quarters.
CFO Sharon Yeshaya said higher interest rates have led the company’s customers to hold higher levels of cash. He said on the company’s earnings call Wednesday that clients hold 23% of their assets in cash, 5% higher than the historical average. The company expects its allocation to cash to decline as interest rates fall, but that could take some time as the Federal Reserve is not expected to start cutting rates until mid-2024. be.
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Meanwhile, cash sorting is an ongoing headwind at Charles Schwab. The company’s stock price plummeted due to the regional bank crisis in March of this year, and has fallen about 38% this year. Schwab’s stock rose Monday on better-than-expected earnings and signs it was turning a corner in cash sorting, but fell on Tuesday along with other asset managers.
Like other asset management companies, Schwab reported a series of asset declines. The company’s sales as of September 30 were $7.82 trillion, down 2% from the previous quarter but up 18% from a year ago.
Interactive Brokers (IBKR) fell 4.1% over the past day after the discount brokerage reported adjusted earnings per share of $1.55, up from $1.08. Net revenue increased 45% to $1.145 billion due to a surge in net interest income.
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“We assume the company’s profitability will remain strong as interest rates may remain ‘high for an extended period of time,'” Morningstar analyst Michael Wong wrote on Oct. 18. Ta. Net interest income will come under pressure. ”
Investors are also concerned that some financial companies are racking up large losses on bonds in their portfolios. Companies shouldn’t have to recognize these losses as long as they hold their bonds to maturity. “We don’t think it’s a big problem, but clearly the market is,” William Blair’s Schmidt said.
Email Andrew Welsch at andrew.welsch@barrons.com.
