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Morgan Stanley (MS) Tops Q1 Earnings as Bond Trading Jumps

Continued strength in bond trading drove Morgan Stanley’s MS first-quarter 2017 earnings of $1.00 per share, which handily outpaced the Zacks Consensus Estimate of 90 cents. Further, this shows an 82% surge from the prior-year quarter.

Shares of Morgan Stanley gained nearly 2.3% in pre-market trading, largely driven by a massive rise in fixed-income, currency and commodities (“FICC”) trading income and higher investment banking fees. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

A drastic jump in bond trading revenues and underwriting revenues were primarily responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.

However, weakness in advisory revenues (due to lower levels of completed M&A activity during the quarter) and lower net interest income (owing to a fall in corporate loans) were the downsides. Moreover, a rise in compensation costs resulted in higher operating expenses.

 

 



Net income applicable to Morgan Stanley was $1.9 billion, up 70% year over year.

Trading Improvement Supports Revenues, Costs Escalate

Net revenue amounted to $9.7 billion, a jump of 25% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.1 billion.

Net interest income was $771 million, down 14% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $9 billion grew 30% year over year, primarily supported by improvement in trading and investments.

Total non-interest expenses were $6.9 billion, up 15% year over year. The rise came on the back of a 21% increase in compensation and benefits.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.7 billion, up 91% year over year. Net revenue of $5.2 billion rose 39% from the prior-year quarter. The improvement was primarily attributable to a significant increase in FICC income and higher underwriting fees, partly offset by lower advisory revenues and equity trading revenues.

Wealth Management: Pre-tax income from continuing operations totaled $973 million, an increase of 24% on a year-over-year basis. Net revenue was $4.1 billion, up 11% year over year, driven by higher asset management fee revenues, transactional revenues and net interest income.

Investment Management: Pre-tax income from continuing operations was $103 million, surging 134% from the year-ago quarter. Net revenue was $609 million, a rise of 28% year over year. The increase reflected investment gains in certain private equity and real estate funds as well as stable asset management fees.

As of Mar 31, 2017, total assets under management or supervision were $421 billion, up 4% on a year-over-year basis.

Strong Capital Position

As of Mar 31, 2017, book value per share was $37.48, up from $35.34 as of Mar 31, 2016. Tangible book value per share was $32.49, up from $30.44 as of Mar 31, 2016.

Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 19.9%, up from 17.4% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 17.4%, up from 15.6% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 17 million shares for nearly $750 million. This was part of the share buyback program announced by the company, under which shares worth up to $3.5 billion can be repurchased through second-quarter 2017.

Our Take

Impressive jump in FICC trading was the highlight of the recently concluded quarter, boosting Morgan Stanley’s results. Further, an improvement in investment banking was a tailwind.  Moreover, Morgan Stanley’s initiatives to offload its non-core assets, in order to lower balance-sheet risks and shift focus toward less capital-incentive operations are commendable.

However, continued decline in interest income despite improving rate scenario remains a near-term concern.

Morgan Stanley Price, Consensus and EPS Surprise

 

Morgan Stanley Price, Consensus and EPS Surprise | Morgan Stanley Quote

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other banking giants, JPMorgan Chase & Co. JPM, Bank of America Corp. BAC and Wells Fargo & Company WFC, have already come out with their first-quarter results. The performance of these companies was encouraging.

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