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Trading, Global Woes to Mar Morgan Stanley (MS) Q3 Earnings

Zacks Equity Research

Morgan Stanley’s MS third-quarter 2019 results, scheduled to be announced on Oct 17, are not likely to reflect much support from trading activities. Therefore, lower trading income, one of the major revenue components for the company, is expected to have impacted its earnings adversely.

Similar to the prior two quarters, the third quarter witnessed a weak trading environment. During the quarter, several concerns like uncertainty related to the U.S.-China trade war and Brexit, expectations of global economic slowdown, the Federal Reserve’s accommodative monetary policy stance and many geopolitical matters persisted. These concerns were enough to keep clients on sidelines.

Further, during an investors’ conference in early-September, CFO Jonathan Pruzan had stated that equity trading had been slow.

The Zacks Consensus Estimate for equity trading revenues of $1.94 billion suggests a fall of 2.3% from the year-ago reported figure. Also, the consensus estimate for fixed income trading revenues of $1.12 billion indicates a decline of 6.8%.

Therefore, third-quarter trading revenues are pegged at $3.05 billion, down 1.5% year over year.
Here are the other factors that are expected to have impacted Morgan Stanley’s third-quarter results:

Lower underwriting fees: Decent equity markets performance and the central banks’ dovish stance seem to have supported equity issuance across the globe. However, fears of economic slowdown and several other concerns weighed on companies’ plans to raise capital by issuing shares. These factors also had an unfavorable impact on IPO activity during the quarter.

Thus, Morgan Stanley’s equity underwriting fees are expected to have been weak. The Zacks Consensus Estimate for equity underwriting fees of $433 million indicates 1.8% year-over-year decline.

Additionally, several geopolitical concerns adversely impacted debt issuances in the to-be-reported quarter despite lower rates. The consensus estimate for debt underwriting fees (accounting for more than 50% of total underwriting fees for Morgan Stanley) is $436 million, suggesting a decrease of 14.2%.

All in all, total underwriting fees are projected to have witnessed an 8.5% fall year over year as the consensus estimate for the to-be-reported quarter is $868 million.

Soft growth in advisory income: While dealmakers across the globe were active during the third quarter, global M&A deal value and volume witnessed a fall due to the above-mentioned concerns as the companies became more risk-averse. These factors likely had an adverse impact on Morgan Stanley’s advisory fees.

Nonetheless, the strong M&A deal pipeline from the previous quarters might have offered some respite. Further, as Morgan Stanley is one of the leading players in this space, it is likely to have provided leverage to attract more business. The consensus estimate for advisory fees is $514 million, a rise of nearly 1% from the prior-year quarter.

Net interest income not to have provided much support: A dismal lending picture — particularly in the areas of commercial and industrial during the third quarter — is expected to have hurt net interest income (NII) growth. Further, decline in interest rates (two rate cuts – in July and September) and flattening of the yield curve are likely to have hampered growth in Morgan Stanley’s NII.

Reduced scope of cost containment: Expense reduction, which has long been the main strategy to remain profitable, is not likely to have been a major support in the quarter. But given the success of Morgan Stanley’s cost-saving efforts and other restructuring initiatives, overall operating expenses are expected to have remained manageable.

Here is what our quantitative model predicts:

Our proven model shows that Morgan Stanley does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Morgan Stanley is -4.00%.

Zacks Rank: Morgan Stanley currently carries a Zacks Rank #3. This increases the predictive power but we need to have a positive Earnings ESP as well.

Morgan Stanley Price and EPS Surprise


Morgan Stanley Price and EPS Surprise

Morgan Stanley price-eps-surprise | Morgan Stanley Quote

Notably, given the concerns related to adverse impact of dismal capital markets activities and lower rates on the Morgan Stanley’s third-quarter performance, analysts are bearish on the stock. The Zacks Consensus Estimate for earnings of $1.13 has moved 2.6% lower over the past seven days. The figure suggests a year-over-year decline of 3.4%.

Also, the consensus estimate for sales of $9.68 billion indicates a fall of 1.9%.

Stocks Worth a Look

Here are a few finance stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

BNY Mellon BK is scheduled to release results on Oct 16. The company has an Earnings ESP of +0.11% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for M&T Bank Corporation MTB is +0.34% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Oct 17.

The Earnings ESP for SLM Corporation SLM is +24.09% and it carries a Zacks Rank of 3, currently. The company is scheduled to report earnings on Oct 23.

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