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Despite MS blowout; small banks may outperform

Lee Brodie

For years, investors have wondered if banks would ever again execute at pre-crisis levels. They got their answer with Morgan Stanley (MS) earnings, released earlier this week. “These were the best quarterly results since 2007,” explained Chris Whalen, senior managing director and head of research at Kroll Bond Rating Agency.

Largely the strength stemmed from Morgan Stanley’s trading business which likely benefitted from a surge of volatility in the market. Excluding items, Morgan Stanley reported earnings of $1.14 per share. Adjusted earnings according to calculations by Thomson Reuters I/B/E/S worked out to $0.85 per share. On that basis, analysts had expected per-share earnings of $0.78. Net revenue excluding items rose 10.3% to $9.78 billion, beating the average estimate of $9.17 billion.

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As impressive as the strength may be, Whalen said his proprietary research suggest that stock investors may prefer owning shares of smaller banks. “The Street thinks Wall Street banks and money center banks win from rising rates, it will take at least two years to see that in earnings.

Smaller banks are far better positioned. “Smaller banks are lending,” Whalen added. “And they have a point better net interest margin.”

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