Morgan Stanley and Bank of America Corp.’s bets on the brokerage business are finally paying off, helped by U.S. stock indexes near all-time highs. The firms’ own shares, however, aren’t getting the same benefit.
Morgan Stanley fell 5.4 percent to $20.31 yesterday after saying profit from global wealth management jumped 33 percent to $376 million in the first quarter. Shares of Charlotte, North Carolina-based Bank of America slid 6.8 percent since the company reported April 17 that income from Merrill Lynch and related units climbed 31 percent to a record $720 million.
“As a shareholder, you can’t be rewarded for a part of the organization doing well if it’s lost in the mix,” said Joshua Siegel, founder of New York-based StoneCastle Partners LLC, which invests in community banks and has $5.7 billion in assets under management. “Investors are saying, let’s look at the rest of the businesses, and the problem is they’re dull.”
Banks are betting more on the old-fashioned business of investing for the rich after their strategy of making markets in stocks, bonds and derivatives turned out to be riskier than predicted. The higher profits at the two brokerages, the world’s largest, are being overshadowed by a slowdown in institutional trading and firm-wide drops in revenue at Morgan Stanley and Bank of America.
Morgan Stanley Chief Executive Officer James Gorman, 54, invested in the brokerage in 2009, creating and taking control of a joint venture with Citigroup Inc.’s Smith Barney. Former Bank of America CEO Kenneth D. Lewis struck a deal to buy Merrill Lynch and its “Thundering Herd” of brokers in 2008 after Lehman Brothers Holdings Inc. collapsed.
Net revenue for Morgan Stanley’s brokerage, run by Greg Fleming, rose to $3.47 billion in the first quarter, 41 percent of the company’s total. The firm also said yesterday that bond- trading revenue dropped 42 percent from a year earlier and stock-trading revenue fell 19 percent, offsetting the gain.
Bank of America posted a net loss in consumer real estate and set aside more money to cover defective mortgages from the financial crisis. Meanwhile, revenue from its wealth division rose 6.6 percent to $4.42 billion, or 19 percent of the bank’s total revenue.
“Their results have been improving the last couple quarters,” said Shannon Stemm, an analyst with Edward Jones & Co. in St. Louis. “There are just other issues going on that are overshadowing the strength that we’ve seen from wealth- management units.”