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Morgan Stanley (MS) Q1 Earnings: What Factors Are at Play?

Morgan Stanley MS is scheduled to announce first-quarter 2016 results on Monday, Apr 18, before the opening bell.

Last quarter, Morgan Stanley surpassed the Zacks Consensus Estimate, attributable to an increase in net interest income and a fall in operating expenses. However, a slump in fixed-income, currency and commodities (“FICC”) trading income remained an undermining factor.

So, will the continuing trading slump hurt Morgan Stanley’s bottom line this quarter as well? Or will the company be able to overcome the tough industry backdrop?

Notably, an earnings beat doesn’t seem to be very difficult for Morgan Stanley as the Zacks Consensus Estimate of 46 cents has witnessed a significant downward revision over the past couple of months. Hence, at present, the estimate looks pretty conservative.

But, our quantitative model does not predict the earnings beat. Here is what it indicates:

Morgan Stanley doesn’t have right combination of two main factors – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for this to happen.

Zacks ESP: The Earnings ESP for Morgan Stanley is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 46 cents.

Zacks Rank: Morgan Stanley carries a Zacks Rank #5 (Strong Sell). This makes our earnings prediction difficult. Also, we caution against Sell-rated stocks going into an earnings announcement, especially if the company has seen negative estimate revisions.

Further, Morgan Stanley’s activities during the first quarter were inadequate to win analysts’ confidence, as evident from 7 downward revisions in earnings estimates (versus no upward revision) over the last 30 days. Also, the Zacks Consensus Estimate fell 8% over the last 7 days.

Factors Influencing Q1 Results

Trading income: Morgan Stanley had buckled under the industry-wide trend led by overall trading weakness and reported lower FICC trading income for the first time in the second half of 2015. The same trend will be continuing in the upcoming release.

Equity markets witnessed huge sell-offs in January and February over several global and domestic issues. This kept investors away from the markets. Though trading activities picked up moderately in March, it wasn’t enough to offset the declines recorded in the prior two months. This also put pressure on FICC revenues during the quarter.

Equity underwriting fees: Per a data compiled by Thomson Reuters, equity capital markets activity totaled $110.8 billion during the first quarter, down 56% year over year. Further, the data projected a 55% year-over-year drop in equity underwriting fees for the entire industry.

Further, Morgan Stanley slipped from the top to the third position among the equity capital markets underwriters during the quarter. Hence, given a dismal backdrop, the company’s equity underwriting fees are bound to be lower.

Advisory fee revenue: According to Dealogic, M&As were down 24% in the first quarter to $4.4 billion, after three consecutive year-over-year increases. This will get reflected in lower strategic and sponsor related revenues.

Further, the data compiled by Thomson Reuters shows that M&A advisory fees totaled $5.3 billion during quarter, a fall of 18% year over year. However, amid such a disappointing global M&As situation, Morgan Stanley held the second spot during the quarter. The company is projected to earn $492 million as advisory fees in the first quarter, reflecting a rise of nearly 4% from $471 million in the prior-year quarter.

Net interest income: Despite a low interest rate environment which continues to hamper interest income growth, a pickup in consumer and commercial loan demand will aid Morgan Stanley’s net interest income.

Expenses: Morgan Stanley has launched a company-wide initiative called Project Streamline. This will enable the company to lower expenses and improve operating efficiency. Hence, in the first quarter, the company should benefit from this initiative.

Though Morgan Stanley had some outflows related to legal settlements, there were no major headwinds holding back earnings significantly. The company has agreed to settle claims related to the sale of mortgage-backed securities (“MBS”) for $3.2 billion. However, as the company had created provisions for the deal last year, it will have no effect on its first-quarter results. Hence, overall the expenses should remain stable during the quarter.

Stocks Worth a Look

Here are a few finance stocks you may want to consider as they have the right combination of elements to post an earnings beat this quarter, according to our model.

The Blackstone Group L.P. BX has an Earnings ESP of +21.62% and a Zacks Rank #3. The company will announce results on Apr 21.

The Earnings ESP for People's United Financial Inc. PBCT is +4.76% and it carries a Zacks Rank #3. The company is slated to release results on Apr 21.

Affiliated Managers Group Inc. AMG has an Earnings ESP of +2.08% and a Zacks Rank #2 (Buy). It is expected to report on Apr 26.

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