Trading Boom: How Morgan Stanley is Thriving in a Soft Dealmaking Environment

Big Wall Street banks are seeing a trading boom as clients react to volatile markets, shifting strategies around tariffs and economic uncertainty.

While those fees have helped offset a slow year for deal making.

Investment bankers hope the new administration would unleash a wave of corporate tie-ups, but uncertainty has many CEOs hitting pauses on some bigger transactions.

Now Morgan Stanley delivered a strong second quarter, reporting 3.54 billion. dollars in profit well above expectations.

Revenue came in at 16.79, also topping forecasts.

Joining me this morning to weigh in is Brendan Brown, managing director at S&P Global Ratings.

Good morning, Brendan.

Thank you so much for joining me.

So first and foremost, what's driving Morgan Stanley's strong return on equity, and do you think it can sustain that performance if dealmaking remains sort of soft in the second half of 2025?

Good morning, Remy.

Thank you for having me.

Yes, Morgan Stanley reported solid results in the 2nd quarter, up compared to the prior year with, with revenue growth coming from the trading business, as you said, volumes were strong and also from their large wealth management business and to a lesser extent their investment management business.

We expect Morgan Stanley to continue to report solid profits even if the investment banking doesn't pick up as much as the. expected.

As you said, uncertainty has weighed on some of the investment banking activity, especially in the M&A area.

But despite that, Morgan Stanley's been able to produce good results because they have plenty of diversification outside of investment banking within that strong trading business, as well as, uh, the very large wealth management business.

So we expect them to continue to perform well in the second half of the year and going into next year as well.

And building on what you just said, how much longer can trading and wealth management carry the load for big banks while investment banking is under pressure?

Well, I, I think a lot of the big banks, Morgan Stanley included, they have lots of diversification and other parts of the business, as, as you said, trading in particular have, has done very well.

As long as you have some uncertainty and high trading volumes, you're probably gonna get a quite a big boost from that, and that can offset.

Some continued weak weakness in parts of the investment banking business, especially in the M&A area.

So there's some trade-offs there, but with asset prices being so high, you get a lot of wealth management income.

The lending side of the business is also doing pretty well.

You've had some loan growth assets that are fixed rate, have repriced at current rates, and that's given a boost to revenue.

Also, for Morgan Stanley and others, asset quality is held together very well, so you haven't had to take a lot of provisions compared to the prior year.

And banks have done a good job of controlling expenses.

So even though you might have weakness in parts of the investment banking business, there's many other parts of the business that have sort of offset that, and then some.

And Morgan Stanley's transformation does include E-Trade and Evans deals, which are seen as longer term plays or so I do want to ask you, are we now seeing the payoff in terms of lower risk and more stable earnings?

Yes, we, we upgraded our rating a few years ago on Morgan Stanley to reflect exactly that.

It had been through sort of a long term transition, um.

Ending or being capped off by the eTrade and Evan acquisitions, which gave a lot more balance to Morgan Stanley's business and made it less dependent on trading volumes and investment banking with a big generation from that wealth management business and to a lesser extent their investment management business as well.

So now trading and Investment banking, that's half the business or even less.

And you have these more stable sources of fee income powering the rest of the business and also very profitable.

And that led us to change our view and raise our rating on Morgan Stanley in 2022, and it's continued to perform well since then.

We expect that to continue.

And Brendan, when it comes to the financial sector, regulatory reform is back in focus.

So how might new rules impact big bank strategy, and could they put pressure on returns moving forward?

This is probably going to be the next 12 months or so, are going to be a big, big time for potential changes to regulation and supervision.

There's some new leadership at the bank regulatory agencies, including the Fed and the other regulators.

Those people being appointed by the Trump administration, as well as the Treasury Secretary have all indicated that they expect to look at Various parts of regulation and supervision.

Certainly one of the biggest pieces of that will be capital requirements.

They'll have to decide how much of the final Basel III endgame standards to adopt.

We're still waiting on the details, and there's a lot more to come.

We're still waiting on proposals from those regulators.

Our base case is it's not going to result in a dramatic change in the amount of capital or liquidity that banks have to hold or the strategies they employ.

But again, we need those details and there is a case, a possibility. that it could have a significant impact and could result in banks making some strategic changes or there'll be some impact to their profitability depending on the details of those proposals, but a lot still left.

OK, Brandon, well, we will have to leave it there.

Thank you so much for joining me and thank you for sharing your insights.

Thank you.