Morgan Stanley's big severance payments squeezed profits
Like Citigroup, Morgan Stanley has been cutting jobs. Also like Citi, those cuts have yet to feed through to profits in its investment bank.
Morgan Stanley's second quarter results, out today, show profits in the institutional securities unit which houses the investment bank shrinking 37% year-on-year in the second quarter. Despite some semi-brutal headcount cuts in which 3,000 people were removed, there's little sign of falling spending on employees. Instead, spending on compensation and benefits actually rose 8% year-on-year in the second quarter.
Morgan Stanley blames its generosity to the people it let go. While it's not quite at French government levels, the bank paid a total of $308m in severance payments in the second quarter of 2023. $207m of that went to employees in institutional securities; $78m went to wealth management and $23m went to investment management. Assuming all 3,000 people disappeared in the three months to June, average severance was $103k per head.
If the bank hadn't splashed out while saying goodbye, profits in the institutional securities unit would still have fallen, but only by 24%. The bank also blamed rising compensation spending in the unit on deferred benefits plans "linked to investment performance." In an effort to offset these increases, it said spending on discretionary compensation (bonuses) is down this year.
Falling spending on this year's bonuses comes as revenues in three of five of the key divisions in Morgan Stanley's investment bank fell by double digits in percentage terms in the first half. Its M&A revenues were down 29%, its fixed income trading revenues were down 21% and its equities trading revenues were down 14%. Things are looking up for Morgan Stanley's equity and debt capital markets bankers though: revenues were 5% and 6% respectively year-on-year in the first six months.
The second quarter of 2023 at Morgan Stanley was also dramatically better than the first, with ECM revenues in particular up 52% year-on-year.
The bank needs to hope this continues. The return on equity in institutional clients unit fell to 6% in the last quarter, below the cost of capital in the industry, which is typically put at around 10%.
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