Morgan Stanley's Q3 performance exceeded expectations across the board, with a rebound in investment banking becoming a highlight and the stock business contributing core momentum

Morgan Stanley's Q3 financial report delivered an unexpectedly strong performance, with net income, earnings per share, and return on equity all reaching record highs for the same period.

On Wednesday before the U.S. stock market opened, Morgan Stanley released its Q3 financial report, showing net revenue of $18.22 billion for the third quarter, a year-on-year increase of 18%, exceeding the estimated $16.64 billion; earnings per share for the third quarter were $2.80, with a return on equity of 18%, compared to an estimate of 13.4%.

In terms of business segments, wealth management net revenue was $8.23 billion, exceeding the estimate of $7.78 billion, while stock trading revenue surged 35% to $4.12 billion, surpassing the estimated $3.41 billion, far exceeding the 6.6% growth expected by analysts and outperforming Goldman Sachs' similar business performance of $3.74 billion.

It is worth mentioning that as concerns about the quality of U.S. credit begin to emerge, Morgan Stanley reported a noteworthy loan loss reserve figure: $0. Morgan Stanley stated that the loan loss reserves decreased compared to the same period last year, primarily due to significant benefits from improved macroeconomic conditions this quarter and a reduction in reserves related to portfolio growth.

Investment Banking Business Rebounds as a Highlight, Stock Business Contributes Core Momentum

The institutional securities segment reported net income of $8.523 billion in Q3 (up 25% year-on-year), becoming the main driver of revenue growth, with core momentum coming from a strong rebound in investment banking and continued expansion in the stock business.

• Investment banking business up 44% year-on-year: Revenue of $2.108 billion, including advisory business of $684 million (up 25% year-on-year), equity underwriting of $652 million (up 79% year-on-year), and bond underwriting of $772 million (up 39% year-on-year). The financial report mentioned that "IPO and convertible bond issuance are active," reflecting a rebound in market risk appetite and the release of corporate financing demand. However, it should be noted that this growth partly relies on the concentrated landing of backlog projects from the first half of the year, and future fluctuations in the macro interest rate environment may affect the reserve of new projects.

• Stock business up 35% year-on-year: Revenue of $4.116 billion, with institutional brokerage business hitting record highs and increased client trading activity. This is directly related to heightened volatility in U.S. stocks in the third quarter and increased repositioning needs from hedge funds, but the sustainability of high volatility is in question.

• Fixed income business appears somewhat lackluster: Revenue of $2.169 billion (up 8% year-on-year), primarily relying on growth in credit and commodity trading, while foreign exchange business revenue declined, creating a drag. Against the backdrop of interest rates remaining high, the role of fixed income as a "ballast" has not yet been fully realized.

Wealth Management Segment Continues Strong Performance, Net Interest Income Up 12% Year-on-Year

The wealth management segment continues its strong performance, with Q3 net income of $8.234 billion (up 13% year-on-year), and a pre-tax profit margin of 30.3%, reaching a historical high for the same period, confirming its "stabilizer" attribute

• Net New Assets (NNA) of $81 billion: up 27% year-on-year, the second highest this year, with fee-based asset inflows of $41.9 billion (up 17% year-on-year), indicating a clear trend of client funds migrating to fee-based products. As of the end of Q3, total client assets in wealth management and investment management reached $8.9 trillion, with asset management fee income growing 12% year-on-year due to scale effects.

• Net Interest Income (NII) increased: loan balance of $173.9 billion (up 12% year-on-year), combined with high interest rates, drove NII to grow 12% year-on-year, becoming the second growth curve for revenue. However, attention should be paid to the potential pressure on NII growth if a rate-cutting cycle begins.

Another highlight of the Q3 financial report is the optimization of cost efficiency: the total expense ratio decreased to 67% (72% in the same period last year), and 69% year-to-date. Specifically, compensation expenses were $7.442 billion (up 10% year-on-year), which is basically in line with revenue growth; non-compensation expenses were $4.754 billion (up 9% year-on-year), mainly due to increased trading execution-related expenditures, which are overall controllable.

Core Logic and Expectation Gap: Can "Synergy" Offset Cyclical Fluctuations?

Morgan Stanley's core development logic this quarter lies in the perfect resonance of its two core engines in a favorable market environment. Previously, the market generally expected a recovery in investment banking, but the staggering 44% year-on-year growth rate, along with record performance in equity business, clearly exceeded most expectations, marking the biggest "expectation gap" in this financial report.

At the same time, the wealth management business lived up to expectations, continuing to play the role of a growth stabilizer, with sustained asset inflows providing a strong financial cushion for the company and funding support for the expansion of institutional business. This "integrated investment banking" model can amplify returns in a pro-cyclical environment and resist risks in a counter-cyclical environment, with its strategic value fully demonstrated this quarter.

Additionally, a favorable regulatory development should not be overlooked. The Federal Reserve has agreed to lower Morgan Stanley's Stress Capital Buffer (SCB) from 5.1% to 4.3%. This indicates regulatory recognition of its risk management and more directly means the company will be allowed to release more capital for stock buybacks and dividends, which is a tangible benefit for shareholders