It has been about a month since the last earnings report for Morgan Stanley (MS). Shares have added about 10.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Morgan Stanley due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Morgan Stanley’s Q3 Earnings Beat on Trading Strength
Morgan Stanley’s third-quarter 2020 adjusted earnings of $1.59 per share easily outpaced the Zacks Consensus Estimate of $1.26. Also, the figure improved 31% from the year-ago quarter.
Results excluded net discrete tax benefit of 7 cents per share. Including this, earnings were $1.66 per share.
As anticipated, Morgan Stanley’s trading business delivered a solid performance. Fixed income trading revenues grew 35% year over year and equity trading income rose 14%. Thus, overall trading revenues increased 20%.
Further, the investment banking business was impressive despite weaknesses in advisory (resulting in a 35% year-over-year decline in corresponding fees) and fixed income underwriting (corresponding fees down 18%). Equity underwriting fees soared 118% from the prior-year quarter. Therefore, IB fees grew 11%.
Additionally, higher net interest income, mainly driven by a rise in loan balance (up 14%) and plunge in interest expenses supported the top line.
However, mounting operating expenses hurt the results to some extent.
Also, the company recorded provision for credit losses on loans and lending commitments of $111 million, up significantly from $51 million in the prior-year quarter. Allowance for credit losses on loans and lending commitments was $1.3 billion as of Sep 30, 2020, an increase of nearly 8% sequentially.
Net income applicable to common shareholders was $2.6 billion, which grew 26% from a year ago.
Improved Trading, Interest Income Aid Revenues, Costs Rise
Net revenues were $11.7 billion, increasing 16% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $10.3 billion.
Net interest income was $1.5 billion, which grew 22% from the year-ago quarter. This was largely due to an 82% plunge in interest expenses.
Total non-interest revenues of $10.2 billion rose 15% year over year.
Total non-interest expenses were $8.2 billion, up 12% from the prior-year number. The increase was largely due to a 15% increase in compensation and benefits cost.
Solid Segment Performance
Institutional Securities: Pre-tax income from continuing operations was $2.05 billion, surging 57% from the prior-year quarter. Net revenues were $6.06 billion, growing 21%. The rise was mainly driven by higher equity underwriting and trading revenues, partially offset by decline in advisory and fixed income underwriting revenues.
Wealth Management: Pre-tax income from continuing operations was $1.12 billion, down 10% from the year-ago figure. Net revenues were $4.66 billion, increasing 7%, as higher transactional and asset management revenues were partially offset by lower net interest income.
Investment Management: Pre-tax income from continuing operations was $225 million, rising 63% from the year-ago quarter. Net revenues were $1.06 billion, up 38%. The increase was mainly attributed to a rise in asset management fees and investment revenues.
As of Sep 30, 2020, total assets under management or supervision were $715 billion, up 41% on a year-over-year basis.
Strong Capital Position
As of Sep 30, 2020, book value per share was $50.67, up from $45.49 in the corresponding period of 2019. Tangible book value per share was $44.81, up from $39.73 on Sep 30, 2019. Morgan Stanley’s Tier 1 capital ratio was 19% compared with 18.8% in the year-ago quarter. Tier 1 common equity ratio was 16.9%, up from 16.6%.
Management expects to record integration and merger-related expenses in the fourth quarter of 2020 as it begins the integration of E*TRADE.
For Asset Management segment, an increase in fee waivers on certain money market funds as a result of the rate environment was witnessed in third-quarter 2020. The company expects to see the full effect of this trend in the fourth quarter.
The company expects 2020 core tax rate to be 22-23%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month.
Currently, Morgan Stanley has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Morgan Stanley has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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