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Trading & Underwriting to Aid Morgan Stanley (MS) Q4 Earnings

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Zacks Equity Research
·6 min read
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Morgan Stanley’s MS fourth-quarter 2020 results, scheduled to be announced on Jan 20, are likely to reflect support from continued market volatility, along with higher client activities. Hence, trading income (one of the major revenue components for the company) is expected to have improved in the quarter, supporting overall performance.

Similar to the first three quarters of 2020, the coronavirus-related health crisis, along with vaccine breakthroughs and the U.S. Presidential elections, weighed on investor sentiments during the fourth quarter. Also, ambiguity over further support from government in terms of more stimulus package and the Federal Reserve’s continued efforts to support the economy kept the clients active, leading to heightened volatility. Therefore, Morgan Stanley’s equity and fixed income markets revenues are expected to have improved.

The Zacks Consensus Estimate for equity trading revenues is pegged at $2.01 billion for the fourth quarter, which suggests a rise of 4.9% from the year-ago reported number. Also, the consensus estimate for fixed income trading revenues of $1.40 billion indicates an increase of 9.7%.

The consensus estimate for trading revenues, which is pegged at $3.37 billion, suggests growth of 5.5% from the year-ago reported figure.

Other Key Factors to Influence Q4 Results

Underwriting fees: Amid near-zero interest rates and the Federal Reserve’s bond purchase program, bond issuance volumes were solid in the quarter as companies took this as an opportunity to bolster their balance sheets. This is likely to have aided Morgan Stanley’s debt underwriting fees, which account for more than 50% of total underwriting fees.

Further, IPO activities were robust, with the fourth quarter being one of the busiest in the recent past. Also, as companies continued to build liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances. These are likely to have aided equity underwriting revenues in the to-be-reported quarter.

The consensus estimate for fixed income underwriting fees is pegged at $493 million, suggesting a fall of 9.4% from the prior year. The Zacks Consensus Estimate for equity underwriting fees of $641 million indicates a jump of 51.9%.

So, the consensus estimate for total underwriting fees of $1.09 billion indicates 18.7% year-over-year rise.

Advisory income: Deal making continued at a fast pace in fourth-quarter 2020 after witnessing a substantial rebound in the third quarter. As economic and business activities gradually resumed and economic recovery started, the number of announced global M&As jumped. Further, amid the pandemic, many companies began business restructuring process with an aim to maintain profitability.

Also, the company’s position as one of the leading players in this space is likely to have provided leverage. Thus, Morgan Stanley’s advisory fees are likely to have been positively impacted.

The consensus estimate for advisory fees is pegged at $435 million, suggesting a plunge of 33.5% from the year-ago reported number.

Net interest income (NII): With economic slowdown and the pandemic-related scare, demand for loans remained soft during the fourth quarter, while commercial real estate and consumer loan portfolios offered some support. This, along with the near-zero interest rates, is likely to have hurt Morgan Stanley’s net interest margin and NII in the quarter. Nonetheless, substantial rise in low-cost deposits driven by the acquisition of E*TRADE Financial in October 2020 is likely to have offered some support.

Expenses: Expense reduction, which has long been the main strategy of the company to remain profitable, is not likely to have been a major support for Morgan Stanley in the quarter. As the company completed the acquisition of E*TRADE and continues to invest in franchise, overall costs are likely to have been elevated in the to-be-reported quarter.

Further, its deal to acquire Eaton Vance EV — announced in October 2020 —  is likely to have resulted in some merger-related charges in the quarter. Also, revenue and volume-related expenses might have increased.

Management expects to record integration and merger-related expenses in the fourth quarter due to the beginning of the integration process of E*TRADE.

What Our Quantitative Model Predicts

Our proven model shows that Morgan Stanley has 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 +2.18%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Morgan Stanley Price and EPS Surprise

Morgan Stanley Price and EPS Surprise
Morgan Stanley Price and EPS Surprise

Morgan Stanley price-eps-surprise | Morgan Stanley Quote

For the fourth quarter, the Zacks Consensus Estimate for earnings has moved 4% upward to $1.29 over the past seven days. The estimated figure suggests a 7.5% rise from the year-ago reported number. Also, the consensus estimate for sales of $11.28 billion indicates a rise of 3.9%.


Other Stocks Worth a Look

Here are a few other major global bank stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

Bank of America BAC is scheduled to release earnings on Jan 19. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +2.79%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Truist Financial TFC is +3.18% and it carries a Zacks Rank of 3 at present. The company is slated to report quarterly numbers on Jan 21.

These Stocks Are Poised to Soar Past the Pandemic

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Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

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Bank of America Corporation (BAC) : Free Stock Analysis Report
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