What's going on?
Bank of America and Morgan Stanley followed rival US investment banks with updates of their own on Wednesday and Thursday – and investors were big fans of their stronger-than-expected results.
What does this mean?
Bank of America’s last quarter was better than investors had predicted, thanks to the part of its business that advises companies on making deals and raising money, whose revenue grew by more than its rivals’. And the bank’s consumer-facing business helped too, partly owing to the income it earned managing high rollers’ investments.
Investment and wealth management represents half Morgan Stanley’s revenue, and last quarter brought home as much bacon as investors were hungry for. It was the bank’s other money-spinners, though, that turned the meal into a feast: Morgan Stanley made more than expected from companies it advised and investors it helped trade stocks and bonds – driving the bank’s profit higher than forecast.
Why should I care?
For markets: Bank stocks’ biggest fans.
Earlier in the week, banks including JPMorgan and Citigroup flagged slowing loan growth (which, in turn, leads to lower fee and interest income). But Bank of America revealed strong loan growth on Wednesday. Likewise, Morgan Stanley generated more “net interest income” – the gap between the amount of interest it receives and pays out – than expected. Investors bought up stocks of both: Morgan Stanley’s had already risen 5% in the past week (with investors predicting a strong update after other banks’ earnings), and on Thursday its shares rose another 4%.
The bigger picture: Stalking the US Federal Reserve.
At the end of this month, the US central bank will announce if it’ll cut the country’s interest rates further. Banks’ updates this week suggest consumers and companies were pretty busy last quarter, so the economy may not need more of a boost. On the other hand, American consumers felt less confident and curbed their shopping in September – and may therefore benefit from a rate cut, which encourages more spending since savers earn less.