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Morgan Stanley’s Asset Management Expands on Rates, New Flow

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Asset management

Morgan Stanley’s (MS) total assets under management rose 8% YoY (year-over-year) to $2.4 trillion on March 31, 2018, helped by a higher valuation of holdings and flow. Quarter-over-quarter, its total assets under management were flat, reflecting lower valuation increases and offset by new, long-term flow.

Asset managers (XLF) are expected to generate lower performance fees in 2018, mainly due to subdued return expectations from equities. Traditional asset managers such as BlackRock (BLK), State Street (STT), and Vanguard could thrive on new flow, whereas alternative asset management companies such as Blackstone (BX) may have to focus on generating alpha to generate higher fees.

Morgan Stanley managed asset management fees of $2.5 billion, representing 14% growth YoY. Whereas its commission and other fees grew 13%, trading fell 54% to $109 million.

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Rate spreads rise

The Fed is targeting two more rate hikes in 2018, bring the federal funds rate to 2.25%–2.5%, compared with 0.25% in 2015. Higher rates have improved banks’ loan book spreads.

Morgan Stanley’s interest income grew 8% YoY to $1.1 billion in 1Q18, reflecting gains from wider interest spreads. Banks’ net interest margins are expected to remain strong for the next few quarters.

The Wealth Management segment’s compensation expenses grew $0.2 billion to $2.5 billion in 1Q18, helped by higher revenue. Non- compensation expenses were flat at $764 million due to strong expense management. Banks’ recent spending patterns indicate they are focusing on financial technology to gain penetration.

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