© Reuters. FILE PHOTO: A sign is displayed on the Morgan Stanley building in New York
By Elizabeth Dilts Marshall and Noor Zainab Hussain
(Reuters) -Morgan Stanley disclosed an almost $1 billion loss from the collapse of private fund Archegos on Friday, muddying a 150% jump in first-quarter profit that was powered by a boom in trading and deal-making.
Morgan Stanley (NYSE:) was one of six banks that had exposure to Archegos Capital Management, a family office fund that defaulted on margin calls late last month and triggered a firesale of stocks across Wall Street.
The bank initially lost $644 million on stocks it held related to Archegos’ positions, which it sold. It decided to “derisk” remaining positions, which triggered another $267 million loss, Morgan Stanley Chief Executive James Gorman said on a call with analysts.
“I regard that decision as necessary and money well spent,” he added.
A handful of major banks that partly financed Archegos’ derivative trades were also left nursing major losses, with Switzerland’s Credit Suisse (SIX:) and Japan’s Nomura bearing the brunt with $4.7 billion and $2 billion in losses, respectively.
Other Wall Street banks including Morgan Stanley, which acted as a prime broker to the fund, were quick to exit their Archegos positions, Reuters and other media outlets reported at the time.
The saga is likely to have regulatory repercussions, however, with a slew of U.S. watchdogs as well as the Senate Banking Committee all probing the incident to better understand why some banks were so exposed to a single client.
“It’s not a financial event in the grand scheme of things, but it will likely raise concerns,” Oppenheimer analyst Chris Kotowski wrote in a note to clients.
Morgan Stanley’s shares were down more than 1% in premarket trading.
TRADING, INVESTMENT BANKING BOOST
Despite the Archegos loss, overall results comfortably beat expectations, wrapping up a robust quarter for Wall Street’s biggest banks that benefited largely from reserve releases, record capital markets activity and a surge in trading volumes in the first quarter of 2021.
The spike in trading, partly led by a Reddit-fueled trading frenzy in “meme” stocks like GameStop Corp (NYSE:), drove a 66% jump in revenue at Morgan Stanley’s institutional securities business.
Unlike rivals JPMorgan Chase & Co (NYSE:) and Bank of America (NYSE:), both Morgan Stanley and Goldman Sachs Group Inc (NYSE:), lack big consumer lending units, which has limited their exposure to loan defaults amid the pandemic and allowed them to focus on their core twin strengths in investment banking and trading.
Morgan Stanley said net income applicable to shareholders rose to $3.98 billion, or $2.19 per share, in the quarter ended March 31, from $1.59 billion, or $1.01 per share, a year ago.
Analysts were looking for a profit of $1.70 per share, according to IBES data from Refinitiv.
Net revenue jumped 61% to $15.72 billion.
Like bigger rival Goldman Sachs, Morgan Stanley benefited from an unprecedented boom in dealmaking through special purpose acquisition companies (SPACs).
Global investment banking fees hit an all-time record of $39.4 billion during the March quarter, according to data from Refinitiv.
Morgan Stanley conceded the second position in the league tables to JPMorgan Chase during the quarter, according to Refinitiv, but still raked in robust investment banking fees — the league tables rank financial services firms on the amount of M&A fees they generate.
Morgan Stanley also generated handsome underwriting revenues from numerous high-profile IPOs of companies including Affirm Holdings and AppLovin Corp.
Investment banking revenue more than doubled to $2.6 billion.