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Morgan Stanley (MS) Stock Declines Despite Q2 Earnings Beat

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Morgan Stanley’s MS second-quarter 2021 adjusted earnings of $1.89 per share easily outpaced the Zacks Consensus Estimate of $1.63. However, the bottom line reflects a decline of 3.6% from the year-ago quarter.

The stock slipped 1.4% during pre-market trading. Notably, the full-day trading session will display a clearer picture.

As anticipated, Morgan Stanley’s trading business did not perform well. Fixed income trading revenues declined 44.7% year over year, while equity trading income rose 7.6%.

Nevertheless, the performance of the investment banking (“IB”) business was decent. Equity underwriting fees increased 21.5% from the prior-year quarter, while fixed income underwriting declined 9.5%. Advisory fees were up 43.7%. Therefore, IB fees improved 15.8%.

Higher net interest income, mainly driven by a rise in total loan balance (up 20%) and a plunge in interest expenses supported the top line.

However, mounting operating expenses hurt the results to some extent.

Notably, the reported quarter’s results include the impacts of the acquisitions of Eaton Vance Corp. (closed in March 2021) and E*TRADE Financial Corporation (October 2020).

Including the integration-related expenses related to E*Trade Financial and Eaton Vance deals, net income applicable to common shareholders was $3.4 billion, which improved 11.8% from the year-ago quarter.

Revenues Improve, Costs Rise

Net revenues were $14.8 billion, up 8% from the prior-year quarter. The top line surpassed the Zacks Consensus Estimate of $13.9 billion.

Net interest income was $1.9 billion, up 16.6% from the year-ago quarter. This was largely due to a 54% decline in interest expenses.

Total non-interest revenues of $12.9 billion increased 6.9% year over year.

Total non-interest expenses were $10.1 billion, up 11.6% year over year.

Provision for credit losses was $73 million, down 69.5% from the prior-year quarter.

Mixed Segment Performance

Institutional Securities: Pre-tax income was $2.5 billion, down 16.5% from the prior-year quarter. Net revenues were $7.1 billion, down 13.5%. The fall was mainly due to a decline in trading revenues, partly offset by higher investment banking revenues.

Wealth Management: The segment includes results of E*Trade Financial. Pre-tax income totaled $1.6 billion, up 43.3% year over year. Net revenues were $6.1 billion, increasing 29.6%, driven primarily by higher net interest income, asset management revenues and other revenues.

Total client assets as of Jun 30, 2021, were $4.5 trillion, up 70.8% year over year.

Investment Management: The segment includes the results of Eaton Vance. Pre-tax income was $430 million, growing 99.1% from the year-ago quarter. Net revenues were $1.7 billion, surging 92.1%. The upswing was driven by higher performance-based income and asset management fees.

As of Jun 30, 2021, total assets under management or supervision were $1.5 trillion, up significantly from $665 billion as of Jun 30, 2020.

Strong Capital Position

As of Jun 30, 2021, book value per share was $54.04, up from $49.57 in the corresponding period of 2020. Tangible book value per share was $40.12, down from $43.68 as of Jun 30, 2020.

Morgan Stanley’s Tier 1 capital ratio (advanced approach) was 19.5% compared with 18.1% in the year-ago quarter. Common equity Tier 1 capital ratio was 17.7%, up from 16.1%.

Capital Deployment Update

In the reported quarter, Morgan Stanley repurchased shares worth $2.9 billion. Additionally, it announced an increased repurchase plan to repurchase shares worth up to $12 billion through Jun 30, 2022.

Also, the company’s board of directors has declared a quarterly dividend of 70 cents per share, a hike of 100% from the prior payout. The dividend will be paid out on Aug 13 to shareholders of record as of Jul 30.

Our Take

Morgan Stanley’s efforts to diversify operations with more focus on those, which are less dependent on the capital markets, are commendable. The acquisitions of Eaton Vance and the buyout of E*Trade Financial are steps in this direction. However, elevated expenses due to the company’s constant investments in franchise will likely hurt the bottom line.

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

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.

Performance of Other Large Banks

Large reserve releases, solid IB performance and a modest rise in loan demand drove JPMorgan’s JPM second-quarter 2021 earnings of $3.78 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $3.05.

First Republic Bank FRC delivered an earnings surprise of 14.04% in second-quarter 2021 on solid top-line strength. Earnings per share of $1.95 surpassed the Zacks Consensus Estimate of $1.71. The bottom line climbed 45.3% from the year-ago quarter.

Goldman Sachs’ GS second-quarter 2021 earnings per share of $15.02 have significantly surpassed the Zacks Consensus Estimate of $9.90. The bottom line compares favorably with 53 cents per share earned in the year-earlier quarter.

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