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Morgan Stanley: profits down, pay up in the investment bank

Like Goldman Sachs, Morgan Stanley did not have a great third quarter. Also like Goldman Sachs, Morgan Stanley is paying its bankers and traders well all the same.

Net earnings across Goldman Sachs fell 33% year-on-year in the third quarter. Net earnings in Morgan Stanley's institutional clients group, specifically, were down 32% year-on-year. But just as Goldman Sachs said yesterday that it must "continue to pay for performance" amidst vigorous competition for its staff, so Morgan Stanley said today that, "compensation expenses increased on higher discretionary compensation" in the institutional clients group. In other words, it will be paying higher bonuses. "Really high performers are in demand across the street," said Morgan Stanley CEO James Gorman today.

Who at Morgan Stanley's investment bank deserves this higher pay? It's not entirely clear. The bank's fixed income, currencies, and commodities (FICC) trading revenues for the first nine months of this year were down 18% compared to the same period last year, worse than any of the other big American banks. Its M&A revenues were a similar story. Equities trading was also woeful.

The quarterly story was arguably worse. Year-on-year, FICC trading, M&A, and DCM were all down well below peers that have already reported. The FICC downfall was particularly egregious. The bank blamed “less favorable market conditions” that “drove declines in rates and foreign exchange,” even though Citi had a record quarter here.

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Morgan Stanley has been implementing a program to cut 3,000 jobs this year. Nonetheless, spending on compensation in the investment bank rose 1% year-on-year in the first nine months of 2023. This was partly a result of severance pay in the second quarter. When severance pay is deducted, total compensation spending fell 2.6%. Given the number of managing directors and others who were cut, this almost certainly implies higher pay per head for those remaining. 

It's not clear how Morgan Stanley employees outside the investment bank will feel about the generous bonus accruals. The institutional clients group has been a drag on profits this year. While net profits there are down 32%, they're down 3% and up 8% in investment and wealth management, respectively. 

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AUTHORZeno Toulon

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