Will the recent negative trend continue leading up to its next earnings release, or is Morgan Stanley due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Morgan Stanley Q4 Earnings Top on Trading, Underwriting
Better-than-expected capital markets performance drove Morgan Stanley’s fourth-quarter 2019 adjusted earnings of $1.20 per share, which outpaced the Zacks Consensus Estimate of 98 cents. Also, the figure jumped 64% from the year-ago quarter. Results for the reported quarter include severance costs of $172 million and exclude net discrete tax benefit.
Morgan Stanley recorded a rise in both trading and investment banking revenues. Specifically, fixed income trading revenues surged 126%, while equity trading income was relatively stable. Overall trading revenues grew 28%.
Now coming to investment banking performance, underwriting income was up 35%. The improvement was driven by a rise in both equity and fixed income underwriting revenues, which were up 31% and 39%, respectively. On the other hand, as expected, advisory fees declined 11%.
Further, higher net interest income, driven by rise in loan balance (up 11%) and lower interest expenses, supported the top line.
However, operating expenses witnessed a rise, mainly due to higher compensation costs (up 38%).
Net income applicable to common shareholders was $2.09 billion, increasing 53%.
For 2019, adjusted earnings of $4.98 per share grew 8% year over year and outpaced the Zacks Consensus Estimate of $4.86. Net income applicable to common shareholders was $8.51 billion, up 4%.
Trading, Investment Banking Aid Revenues, Costs Rise
Net revenues for the quarter were $10.86 billion, up 27% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $9.52 billion.
For 2019, net revenues grew 3% to $41.42 billion. It also surpassed the consensus estimate of $40.08 billion.
Net interest income was $1.43 billion, jumping 45% from the year-ago quarter. This was largely due to a 19% fall in interest expenses.
Total non-interest revenues of $9.42 billion jumped 25% year over year.
Total non-interest expenses were $8.12 billion, up 21%.
Impressive Quarterly Segment Performance
Institutional Securities: Pre-tax income from continuing operations was $1.13 billion, increasing 44% year over year. Net revenues were $5.05 billion, up 32%. The rise was mainly driven by higher trading income, investment banking revenues and investment revenues.
Wealth Management: Pre-tax income from continuing operations totaled $1.16 billion, up 15%. Net revenues were $4.58 billion, up 11% year over year as rise in transactional revenues and asset management revenues were partially offset by lower net interest income.
Investment Management: Pre-tax income from continuing operations was $447 million, surging substantially from $74 million in the year-ago quarter. Net revenues were $1.36 billion, soaring 98%. The increase was mainly driven by rise in asset management fees and investment revenues.
As of Dec 31, 2019, total assets under management or supervision were $552 billion, up 19% on a year-over-year basis.
Strong Capital Position
As of Dec 31, 2019, book value per share was $45.82, up from $42.20 as of Dec 31, 2018. Tangible book value per share was $40.01, up from $36.99.
Morgan Stanley’s Tier 1 capital ratio was 18.6% compared with 19.2% in the year-ago quarter. Tier 1 common equity ratio was 16.4%, down from 16.9%.
Share Repurchase Update
During the fourth quarter, Morgan Stanley repurchased shares worth $1.5 billion. This was part of the company’s 2019 capital plan.
Management projects efficiency ratio to be in the range of 70-72% in 2021, below 72.7% in 2019.
For the WM segment, the company expects pre-tax margin to be 28-30% in 2021.
Loan growth is projected to be in mid-single-digits range in 2020. Further, NII is likely to be stable as the full impact of 2019 three rate cuts, the realization of the forward curve and the continued diversification of deposits will be offset by lending growth.
The company expects 2020 effective tax rate to be slightly higher or roughly 22-23%. It is likely to report some quarterly volatility.
Management expects to fully convert all of the existing corporate clients to the Morgan Stanley work model by the end of 2021.
Return on tangible common equity (ROTCE) ratio of 13-15% in 2021.
Management targets ROTCE ratio to be 15-17% and efficiency ratio to be less than 70%.
For the WM segment, the company expects pre-tax margin to be more 30%.
How Have Estimates Been Moving Since Then?
Estimates review followed an upward path over the past two months. The consensus estimate has shifted 7.58% due to these changes.
At this time, Morgan Stanley has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Morgan Stanley has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.