Morgan Stanley beats on investment banking surge, BNY Mellon tops estimates

Yahoo Finance’s Brian Cheung breaks down Morgan Stanley’s and BNY Mellon’s first quarter earnings, along with key take aways from this week’s earnings on big banks.

Video transcript

MYLES UDLAND: Morgan Stanley out with its quarterly results. Yahoo Finance's Brian Cheung joins us with those numbers, as well as what we heard, Brian, from BNY Mellon.

BRIAN CHEUNG: Well, guys, we made it through the end of banking earnings season. Well, of course, that means that all the other companies are about to report. But at least for me, I'm about to wrap up.

And Morgan Stanley reporting their earnings this morning. Their investment banking revenues up, get this, 128%. That was to $2.6 billion for the quarter. That explains why they were able to beat on the top and bottom lines, $15.7 billion in topline revenue. On the bottom line, earnings adjusted per share of $2.22.

Now keep in mind, Morgan Stanley had a pretty noisy quarter when you consider that this is the first quarter that they had announced that covers the Eaton Vance acquisition that it had finished on March 1. This is also only the second quarter of earnings reflecting that E-Trade acquisition. So Morgan Stanley obviously having a very big hand now in the retail trading and brokerage platform space.

But one thing I want to point out that's very unique about their earnings report was this little footnote that said they had a loss of $644 million, quote, related to a credit event for a single prime brokerage client. There was also another $267 million of subsequent trading losses related to the same event. And guys, you can kind of read between the lines who might that be. It might be Archegos.

But one other company that I want to highlight here in the earnings for this morning is the BNY Mellon. Their revenue did decrease 5% year-over-year. So not a rosy story for all of the banks. And that's the reason why I want to point them out. They did have revenue on the top line, $3.86 billion. They had earnings adjusted of about $0.97 per share. But keep in mind, this is a custody bank.

So when talking about the banking industry, you're not going to look at loan pipelines for this bank, or State Street, for that matter. Money markets have had a really weird time. Negative returns have forced things like fee waivers, which have impacted BNY. It's worth noting, however, that their Investment and their Wealth Management did appear to do pretty well. And Catherine Keating, the CEO of the Wealth Management business over at that bank, was telling Yahoo Finance's Andy Serwer earlier this week that the stimulus from the Fed and Congress was really helping the banking industry at large.

But again, BNY and Morgan Stanley wrapping up the round of bank earnings that we've had this week, guys.

BRIAN SOZZI: Brian, a long week for you, a lot a lot of bank earnings calls to get through. What are some of your takeaways?

BRIAN CHEUNG: Yeah, well, I think the big takeaway from the banking industry, if you're looking at specifically the big four banks, Citi, JP, Wells Fargo, Bank of America, the story is those tepid pipelines. Loan books have not really grown that much. When you look at JPMorgan Chase Consumer and Community Banking Division, down 8%, or 7%. Bank of America loans down 8%. Wells Fargo average loans down 8%.

So we're seeing a lot of those loan paydowns as a lot of the stimulus has helped consumers and also businesses manage their debt. But whether or not that's going to kind of decrease the pressure valve for right now so that later on in the year, maybe in the second half, we can start to see more levering in terms of getting more loans out there as the economy reopens, that's really what these banks are hoping. When you hear net interest income guidance from a lot of these banks kind of guide on the higher end towards this year, that is definitely part of the optimism, although you're not seeing it in those loan pipelines right now.

And then one other thing that's worth mentioning, of course, everyone's got their eye on the reserves for loan losses. This is the buffer that the big banks had built up in the midst of the pandemic last year to sustain any sort of non-performing loans. That really ballooned to as high as $97 billion, at least at those four banks. We've seen some releases over the past two quarters. Those allowance for loan losses are now about $78 billion at the back of the napkin math for those four banks specifically.

So it's definitely lower. But that level is still almost double where it was pre pandemic, which shows that there's definitely still a little bit more wiggle room for the banks to release further reserves in coming quarters, something that I'm sure the bank analyst community is going to be very dialed into in coming quarters.

MYLES UDLAND: The SLR thing, I couldn't keep that straight.

BRIAN CHEUNG: Well, the SLR thing is very interesting. Because basically, it didn't necessarily impact the quarter of, because the exemption that the Federal Reserve had put into place expired at the end of March. And basically what this means is that the SLR ratios will probably go down for a lot of the banks. We've heard some commentary from CFOs at a lot of these large banks about what that impact might be. But all of them have said at large, this is not going to impact our ability to lend into the economy.

And for those that are wondering what the heck is the SLR, it's a supplementary leverage ratio. It's a banking regulation that determines the capital levels that a bank can have before they're ultimately punished by regulators. But JPMorgan Chase was the closest, I believe, to the regulatory minimum, about 5%. I think they were at about 5.5%.

So I think they're all well above those regulatory minimums, although Jamie Dimon, I think, had some colorful commentary, saying this is going to hurt the economy but not JPMorgan. But of course, who knows what that means?

MYLES UDLAND: All right. Well, we'll spare the audience the full Yahoo U on SLRs there. Yahoo Finance's Brian Cheung with the latest on bank earnings season.