Morgan Stanley reports excellent Q1 2025 results

2024 was even better than the previous year, and 2025 is off to a flying start with the highest quarterly profit in the company's history. These additional gains are driven by trading activities, and to a lesser extent by the successful offloading of debt carried on the balance sheet since Elon Musk's takeover of Twitter.

The fears of a cyclical downturn that we detailed in Morgan Stanley: A new era - have not yet materialized for the investment bank.

The group of seven major lenders - led by Morgan Stanley, including BNP and Société Générale - which had financed the transaction - were forced to keep unsaleable, discounted debt on their books.

Fortunately for them, the election of Donald Trump and the - possibly very temporary - return to favor of the South African-born entrepreneur Elon Musc offered a providential way out.

However, the other segments of Morgan Stanley's investment banking division have not been outdone: they have all resisted well, including the advisory business, which was expected to be stunned by the new American president's antics.

As for the asset management division, it posted a marked increase in assets under management. Morgan Stanley clearly remains in "risk on" mode, with loans to its wealthy clients on the rise: $162.5bn at the end of March 2025, compared with $147.4bn at the same time last year.

The vitality of non-interest-rate related activities offset a slight decline in net interest margin, which fell from $2.55bn to $2.35bn year-on-year. The firm's pre-tax profit margin reached 31% and its expense ratio 68% - two traditional benchmarks of performance that remain a notch below Goldman Sachs.

As at the same time last year, Morgan Stanley redirects a billion dollars into share buybacks, albeit at a much higher price than then - $126 on average, compared with $87 at the beginning of 2024. It's worth noting that the company has eased off on share buybacks, reflecting its positioning vis-à-vis its current valuation levels.

The latter, in fact, are still on their highs, in line with the bank's current return on equity. In February, the stock had even reached three times tangible equity, before beginning a plunge that should bring it back down to two times tangible equity.

Anchored on these all-time highs since the pandemic, such valuation levels had not been seen since the run-up to the subprime crisis. It is not certain, therefore, that such largesse is sustainable.

Unless the 2025-2040 cycle is as exceptional for Wall Street as 2010-2025 was, which is doubtful in light of recent comments by the US Treasury Secretary. In this respect, the recent setbacks at Jefferies could act as a harbinger.