Morgan Stanley's first-quarter profit beat expectations as rising revenue from its wealth management division offset declines in its investment banking and trading units.
Shares, however, fell more than 3% at $86.81 in premarket trading on Wednesday as investment banking revenue fell 24% to $1.25 billion and the bank set aside $234 million in the quarter to cover bad loans.
Provisions rose from $57 million a year ago as Morgan Stanley braces for a deterioration in commercial real estate and customers potentially falling behind on loan payments amid rising costs of borrowing and recession worries.
Revenue in the wealth management unit jumped 11%, bringing in $110 billion in net new assets, of which only about $20 billion came from regional banks in response to the March banking crisis.
"In periods of challenges within the broader economic environment, we continue to be a destination of choice for our clients and their assets," Chief Financial Officer Sharon Yeshaya told Reuters in an interview.
The downswing in investment banking activity for Morgan Stanley, which forms the core of the bank's business, dragged total revenue down nearly 2% to $14.5 billion in the quarter.
Wall Street's investment banks have suffered the most from a downturn in mergers and acquisitions as investors shunned risky bets against the backdrop of volatile markets and rapidly rising interest rates.
The turmoil has also brought initial public offerings to a virtual halt as startups put off market debuts until investor sentiment improves.
Global mergers and acquisitions activity shrank to its lowest level in more than a decade in the first quarter of 2023, with volumes slumping 48% to $575.1 billion as of March 30, compared to a year earlier, according to data from Dealogic.
"The investments we have made in our Wealth Management business continue to bear fruit," Chief Executive James Gorman said in a statement.
Meanwhile, revenue from equities trading fell 14%, while fixed income trading dropped 12%.
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The bank's closest rival Goldman Sachs Group Inc also reported a slump in its investment banking unit as dealmaking and bond trading slumped and it lost money on the sale of some assets in its consumer business.
Meanwhile, banking giants JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc reaped windfalls from higher interest payments, while setting aside billions of dollars to prepare for a worsening economy.
COMMERCIAL REAL ESTATE, A CONCERN
Some of the largest U.S. banks also singled out office commercial real estate last week as an area of growing concern, with property values falling and more borrowers defaulting on their loans amid rising interest rates and a slowing economy.
Results from Morgan Stanley round out a choppy reporting season for Wall Street's biggest banks as the collapse of two mid-sized lenders in March sent shockwaves across the world and further fueled recession worries.
While investment banks like Morgan Stanley and Goldman remain relatively insulated from the broader contagion worries of the crisis, the resultant uncertainty has again hurt the outlook for dealmaking, dampening hopes of recovery in the near term.
The bank earned $1.70 per share, beating analysts' average estimate of $1.62 per share, according to Refinitiv data.
Profit applicable to the bank's common shareholders for the three months ended Mar. 31 fell 20% to $2.8 billion.