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Morgan Stanley (MS) Tops Earnings Despite Trading Slump

Morgan Stanley’s MS first-quarter 2016 earnings from continuing operations of 55 cents per share beat the Zacks Consensus Estimate of 46 cents. However, this shows a significant deterioration from 85 cents per share earned in the prior-year quarter. The year-ago figure excludes the tax benefit and DVA.
 

 

Shares of Morgan Stanley gained nearly 3% in pre-trading hours, implying a positive market reaction to the earnings beat. However, as the challenging operating backdrop persisted, the company’s top line witnessed a decrease. Hence, the stock’s price performance after the full day’s trading will give a better indication about the investors’ sentiments.

Though the quarter witnessed higher net interest income and advisory fees as well as a fall in operating expenses, this wasn’t sufficient to offset industry-wide trading weakness. Given the lower level of client activity, a shift toward electronic trading and stringent regulatory requirements, Morgan Stanley recorded lower fixed-income, currency and commodities (“FICC”) trading income in this quarter as well. Further, Equity trading and underwriting income depicted weaknesses.

Net income applicable to Morgan Stanley was $1.13 billion, down 53% year over year.

Performance in Detail

Net revenue amounted to $7.79 billion, a decrease of 21% from the prior-year quarter. Further, it lagged the Zacks Consensus Estimate of $8.34 billion.

Net interest income was $899 million, up 51% from the year-ago quarter. This was driven by a 5% fall in interest expenses and 18% growth in interest income. Meanwhile, total non-interest revenue of $6.89 billion fell 26% year over year, as all components witnessed deterioration.

Total non-interest expenses were $6.05 billion, down 14% year over year. The fall is attributable to a 6% decline in non-compensation expenses and a 19% reduction in compensation and benefits.

Morgan Stanley’s compensation to net revenue ratio for the reported quarter was 47% versus 46% in the year-ago quarter.

Quarterly Segmental Performance

Institutional Securities (IS): Pre-tax income from continuing operations was $908 million, down 50% year over year. Net revenue was $3.71 billion, a decline of 30% from the year-ago quarter. The drastic fall was primarily due to lower FICC income, underwriting fees, and equity sales and trading net revenues, partly offset by higher advisory revenues.

Wealth Management (WM): Pre-tax income from continuing operations totaled $786 million, 8% lower on a year over year basis. Net revenue was $3.67 billion, down 4% year over year, due to a fall in transactional revenues and asset management fee revenue. These were, nevertheless, partially offset by a rise in net interest income.

Investment Management (IM): Pre-tax income from continuing operations was $44 million, down 76% from the year-ago quarter. Net revenue was $477 million, a fall of 29% year over year.

As of Mar 31, 2016, total assets under management or supervision were $405 billion, almost stable on a year over year basis.

Capital

As of Mar 31, 2016, book value per share was $35.34, up from $33.80 as of Mar 31, 2015. Tangible book value per share was $30.44, up from $28.91 as of Mar 31, 2015.

Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 17.4% versus 14.7% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 15.7% versus 13.1% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 25 million shares for nearly $625 million. This was part of the share buyback program announced by the company, under which shares worth up to $3.1 billion can be repurchased through the second quarter of 2016.

Our Take

Continued tough operating environment led to a substantial decline in the top line. Though interest income showed improvement, a slump in trading activities drove the results down. Also, stringent capital norms may somewhat reduce the company’s flexibility with respect to its investments and lending volumes. Further, concerns related to new regulatory requirements and persistent intense pricing competition are exerting pressure on Morgan Stanley’s financials.

Nonetheless, Morgan Stanley’s initiatives to offload its non-core assets in order to lower balance-sheet risks and shift focus toward less capital-incentive IM and WM segments, are commendable. Also, a full control of Morgan Stanley Wealth Management joint venture continues to aid the diversification of the company’s revenue base.

Currently, Morgan Stanley carries a Zacks Rank #5 (Strong Sell).

Among other banking giants, JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Citigroup Inc. C have come out with their first-quarter results. The performances of these companies have not been encouraging.

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