On May 9, we downgraded our long-term recommendation on major global bank Morgan Stanley (MS), to Neutral from Outperform. The recommendation was lowered to reflect the persistently high operating expenses that the company continues to witness.
Why the Downgrade?
Though Morgan Stanley’s operating expenses decreased in the first quarter, we anticipate them to remain high in the near term, as restructuring initiatives announced will likely take time to benefit the financials. Further, these initiatives are not expected to fully control costs as the company continues to invest in franchise.
Nevertheless, Morgan Stanley’s adjusted earnings from continuing operations beat the Zacks Consensus Estimate. Better-than-expected results were mainly driven by a fall in operating expenses, partially offset by a decrease in revenues. Additionally, an improved asset position and stable capital ratios were the other highlights.
Following the release of first-quarter results, the Zacks Consensus Estimate for 2013 has remained stable at $2.10 per share. The Zacks Consensus Estimate for 2014 has inched nudged up nearly 1% to $2.57 per share. Thus, Morgan Stanley now has a Zacks Rank #3 (Hold).
Morgan Stanley has been striving hard to stabilize revenues. For this, the company plans to acquire the remaining 35% stake in Morgan Stanley Wealth Management (MSWM), its joint venture with Citigroup Inc. (C). Once the company fully controls the JV, it will get one of the largest retail platforms, which will consequently lower its dependence on volatile trading revenues.
Stocks That Warrant a Look
Some major global banks that are performing better include JPMorgan Chase & Co. (JPM) and The Goldman Sachs Group, Inc. (GS). Both these carry a Zacks Rank #2 (Buy).
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