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Trading, Underwriting to Mar Morgan Stanley (MS) Q4 Earnings

Zacks Equity Research

Morgan Stanley’s MS fourth-quarter 2018 results, slated for release on Jan 17, are not likely to get much support from trading activities. While equity trading revenues, one of the major revenue components, are expected to support the company’s earnings, soft fixed income trading will likely be an offsetting factor.

Similar to the first three quarters of 2018, substantial volatility continued in the equity markets during the fourth quarter. Several major developments — including the further escalation of U.S.-China trade war, Brexit-related uncertainty, fears of global economic slowdown, changing yield curve and the Federal Reserve’s stance related to interest rate hikes — rocked the markets and kept the trading desks busy.

Like always, an increase in equity trading activities is expected to support Morgan Stanley’s overall trading revenues. The Zacks Consensus Estimate for equity trading revenues of $2.06 billion reflects a rise of 3.2% from the prior quarter. However, the consensus estimate for fixed income trading revenues of $848 million indicates a slump of 29.3% on a sequential basis.

Therefore, fourth-quarter trading revenues are expected to be $2.71 billion, declining 12.7% from the last reported quarter.
Here are the other factors that are expected to impact Morgan Stanley’s fourth-quarter results:

Underwriting fees to decline: Seasonal slowdown is expected to hamper underwriting performance to some extent in the quarter to be reported. Fears of global economic slowdown and increased volatility weighed on companies’ plans to raise capital by issuing shares. The Zacks Consensus Estimate for equity underwriting fees of $374 million shows a decrease of 15.2% from the last quarter.

Further, rise in interest rates is likely to have lowered companies’ involvement in debt issuance activities. As debt origination fees account for more than 50% of total underwriting fees for Morgan Stanley, this will likely have an adverse impact on overall underwriting fees. The Zacks Consensus Estimate for debt underwriting fees of $437 million reflects a sequential decrease of 14%.

All in all, total underwriting fees are projected to witness a 14.5% fall from the prior quarter as the consensus estimate for the to-be-reported quarter is $811 million.

Modest rise in net interest income (NII): Increase in interest rates will likely lead to a rise in interest income. Also, overall loan demand was decent — particularly in the areas of commercial and industrial. So, NII is anticipated to witness a modest improvement.

In 2018, management expects NII growth to slow down, based on anticipated funding mix and higher deposit betas than experienced in 2017.

Advisory fees to show strength: While decline in global M&A deal volume (due to volatile markets and increase in borrowing costs) in the fourth quarter will likely hamper Morgan Stanley’s advisory fees, the strong M&A deal pipeline from the previous quarters will provide modest support. Also, as the company is one of the leading players in this space, it will likely provide leverage to attract more business. The consensus estimate for advisory fees is $679 million, a surge of 33.1% sequentially.

Lesser scope of cost containment: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be a major support in the December-end quarter. But given the success of Morgan Stanley’s cost-saving efforts and other restructuring initiatives, overall operating expenses are likely to remain manageable. However, as revenues are expected to increase, compensation expenses will likely witness a slight increase.

Here is what our quantitative model predicts:

Chances of Morgan Stanley beating the Zacks Consensus Estimate are high this time. This is because the stock has the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing 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 +0.83%.

Zacks Rank: Morgan Stanley carries a Zacks Rank #3, which further increases the predictive power of ESP.

Morgan Stanley Price and EPS Surprise


Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote

Notably, the Zacks Consensus Estimate for earnings of 90 cents reflects 7.1% growth on a year-over-year basis. However, the consensus estimate for sales of $9.4 billion indicates a marginal fall from the prior-year quarter.

Other Stocks Worth a Look

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

U.S. Bancorp USB is scheduled to release results on Jan 16. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.26%.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

M&T Bank Corporation MTB has an Earnings ESP of +0.80% and holds a Zacks Rank #3. It is scheduled to report results on Jan 17.

Zions Bancorporation, National Association ZION has an Earnings ESP of +0.75% and currently carries a Zacks Rank of 3. The company is slated to release results on Jan 22.

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