Morgan Stanley’s (MS Quick QuoteMS - Free Report) co-president Andy Saperstein said that the firm expects a year-over-year decline in its trading and investment banking (“IB”) revenues in the second quarter of 2023.

Saperstein believes that because of a more challenging economic environment, Morgan Stanley’s sales and trading “results will be notably down year over year versus a strong second quarter last year,” while “investment banking is also very challenged."

The challenging economic environment has led to a persistent slowdown in the IB business, because of which Morgan Stanley has been compelled to reconsider its headcount. MS has been considering cutting around 7% of jobs in the Asia-Pacific region (excluding Japan). This is part of the broader 3,000 IB job cuts that the company announced earlier.

Of the total cuts, China is likely to take the biggest hit, as slowing economic growth in the country is curbing deal-making. Last year, MS slashed roughly 50 IB jobs in the Asia-Pacific region, with a large number being China-focused positions.  

While the overall trading business performance has been decent, the performance of the company’s IB business was weak in the first quarter of 2023. A host of factors, such as geopolitical tensions, inflation, rising interest rates and fears of a global recession, acted as headwinds for mergers and acquisitions.

Thus, deal volume and total deal value numbers crashed in the quarter. For the same reasons, IPOs, follow-up equity issuances and bond issuances dried up.

Due to these headwinds, Morgan Stanley’s equity underwriting fees decreased 22% year over year and fixed-income underwriting declined 6%. Advisory fees were down 32%. Therefore, total IB fees dipped 24% year over year.

Notably, Saperstein, who leads the company’s wealth management unit, is a candidate to succeed CEO James Gorman after his retirement.

Saperstein said that the wealth business is targeting to reach $12 billion in annual pretax profits over several years, and more than double its client assets under management to $10 trillion.

Saperstein also said that the use of artificial intelligence (“AI”) could transform the work of financial advisers who serve wealthy clients.

He added, “We're continually looking for game-changing technology to integrate into our platform. One recent example of that approach to innovation is our partnership with open AI. That relationship began well over a year ago, before they were a household name.”

Over the past six months, shares of MS have declined 11.2% compared with the industry’s fall of 17.5%.

Image Source: Zacks Investment Research

Currently, Morgan Stanley carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Competitive Landscape

Morgan Stanley is not the only one that is trimming its workforce amid the challenging economic environment. Wall Street firms, including Bank of America (BAC Quick QuoteBAC - Free Report) and Citigroup (C Quick QuoteC - Free Report) , have been taking similar steps in their IB and wealth management divisions.

This March, Citigroup initiated a round of job cuts, slashing hundreds of jobs across the firm, which accounted for less than 1% of its total workforce. According to people familiar with the matter, who asked not to be identified, the company’s IB division, its operations and technology organization, and the U.S. mortgage-underwriting division were among those affected.

In its IB division, Citigroup was struggling because of the industry-wide slowdown in deal-making. In its mortgage division, the company was grappling with reduced mortgage demand because of rising prices and a rapid increase in mortgage rates.

Similarly, in February, it was reported that Bank of America was planning to cut jobs in its investment bank. The cuts are expected to have affected less than 200 bankers globally.