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 revenues during the quarter. But according to third quarter earnings, the wealth division’s net revenue was $6.79 billion, down 1% from the first quarter and up 2% from 2023’s second quarter (with daily revenue of approximately $100 million, which CEO Ted Pick attributed to “strong fee-based flows” during this morning’s earnings call).
Profit before taxes was up 1% and 8% quarter-over-quarter and year-over-year, respectively. However, net interest income stood at $1.798 billion, down 3% from the first quarter and 17% at this point in 2023.
On the earnings call, Chief Financial Officer Sharon Yeshaya attributed the drop in NII to “the decline in sweeps, largely attributable to the seasonality of tax payments.” She noted the company intended to change its advisory sweep rates “against the backdrop of changing competitive dynamics.” She warned that NII could “decline modestly” next quarter.
“Importantly, inclusive of these pricing changes, the rate paths and our expectations around client behavior, we believe that NII should inflect higher as you look out into next year,” she said.
Client assets were $5.7 trillion, up 4% and 16% quarter-over-quarter and year-over-year, respectively. Financial advisor-led assets 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 the wealth division. However, he said the transactional side had been “relatively weak,” which he attributed to lagging capital markets activity. He echoed the belief that NII should stabilize over the next year.
“You put those together, the scale of the business, the funnel and the processing over $100 million revenues a day that continues to grow, we’re going to continue to achieve operating leverage, it’s that simple,” he said.
Meanwhile, Bank of America’s wealth division faced similar challenges. The bank’s chief financial officer noted that the firm’s robust revenue asset management fees offset the “headwind” of lower net interest income.
Like Morgan Stanley, Bank Of America’s wealth business saw high revenue ($5.6 billion, up 6% year-over-year), along with a record $4.6 trillion in total client balances, an 11% boost from last year’s second quarter (including Merrill Wealth, Consumer Investments and Bank of America Private Bank). Merrill Wealth had $3.4 trillion in assets, 10% higher than Q2 2023.
However, the bank’s global wealth and investment management divisions also fell short in net interest income, dropping to approximately $1.7 billion this quarter from $1.8 billion in the prior quarter (NII was also roughly $1.8 billion in Q2 of 2023).
In Bank of America's second quarter earnings call also held this morning, CEO Brian Moynihan said the firm long expected third-quarter NII to be choppy and expected NII to grow in the year’s third and fourth quarters. CFO Alastair Borthwick noted the strong 14% boost in asset management fees helped soften the blow caused by lower NII.