Morgan Stanley's wealth business missed expectations this quarter, as the division faced a steep 17% year-over-year decline in net interest income.
The company boasted that its wealth division hit record client assets and asset management fee income during the quarter. But according to third-quarter earnings, the wealth division's net income was $6.79 billion, down 1% from the first quarter and up 2% from the second quarter of 2023 (on daily revenue of about $100 million , which CEO Ted Pick attributed to “strong fee-based flows” during this morning's earnings call).
Pre-tax profit rose 1% and 8% quarter-on-quarter and year-on-year, respectively. However, net interest income stood at $1.798 billion, down 3% from the first quarter and down 17% at this point in 2023.
On the earnings call, Chief Financial Officer Sharon Yeshaya attributed the decline in NII to “a decline in write-offs, primarily attributable to the seasonality of tax payments.” It noted that the company intended to change its advisory deletion fees “against the backdrop of changing competitive dynamics”. She warned that the NII could “decline modestly” next quarter.
“Importantly, including these price changes, rate paths and our expectations around customer behavior, we believe the NII should move higher as we look into next year,” she said.
Client assets were $5.7 trillion, up 4% and 16% quarter-over-quarter and year-over-year, respectively. Assets managed by financial advisors were $4.4 trillion, fee-based assets were $2.2 trillion, and self-directed assets were $1.2 trillion.
According to Pick, fee-based flows remained “a growth space” for wealth sharing. However, he said the transactional side had been “relatively weak”, which he attributed to lagging capital markets activity. He echoed the belief that the NII should stabilize over the coming year.
“You put them together, the scale of the business, the pipeline and the processing of over $100 million in revenue per day that continues to grow, we will continue to achieve operating leverage, it's as simple as that,” he said.
Meanwhile, Bank of America's wealth division faced similar challenges. The bank's chief financial officer noted that the firm's strong income asset management fees offset the “headwind” of lower net interest income.
Like Morgan Stanley, Bank of America's wealth business saw strong revenues ($5.6 billion, up 6% year over year), along with a record $4.6 trillion in total client balances, an increase of 11% from the second quarter of last year (including Merrill Wealth, Consumer Investments and Private Bank of America). Merrill Wealth had $3.4 trillion in assets, up 10% from Q2 2023.
However, the bank's global wealth and investment management divisions also fell in net interest income, falling to about $1.7 billion this quarter from $1.8 billion in the previous quarter (NII was also roughly $1.8 billion in the second quarter of 2023).
In Bank of America's second-quarter earnings call also held this morning, CEO Brian Moynihan said the firm had long expected the third-quarter NII to be volatile and expected the NII to rise in the third and fourth quarters. of the year. CFO Alastair Borthwick noted that the strong 14% rise in asset management fees helped soften the blow from the lower NII.