Morgan Stanley (MS) Q3 Earnings Beat on Solid Underwriting

Surprisingly solid underwriting performance and decent trading income drove Morgan Stanley’s MS third-quarter 2018 earnings of $1.17 per share, which easily outpaced the Zacks Consensus Estimate of $1.00. The figure also reflected 26% jump from the prior-year quarter.

Shares of Morgan Stanley have gained more than 2.8% in pre-market trading. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

Strong growth in equity underwriting fees (up 62%), debt underwriting revenues (up 15%) and higher revenues from equity trading (up 7%) more than offset weaknesses in bond trading and advisory businesses. Further, net interest income recorded an increase, driven by higher interest rates and loan growth.

Also, the company’s capital ratios remained strong. However, operating expenses recorded a rise.

Net income applicable to Morgan Stanley was $2.1 billion, up 19% year over year.

Trading, Investment Banking Aid Revenues, Costs Rise

Net revenues amounted to $9.87 billion, a rise of 7% from the prior-year quarter. In addition, the top line surpassed the Zacks Consensus Estimate of $9.53 billion.

Net interest income was $936 million, jumping 20% from the year-ago quarter. This was largely driven by a rise in interest income, partially offset by higher interest expenses.

Total non-interest revenues of $8.94 billion grew 6% year over year, primarily supported by improvement in trading and investment banking.

Total non-interest expenses were $7.02 billion, up 5% year over year.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.56 billion, increasing 26% year over year. Net revenues of $4.93 billion grew 13% from the prior-year quarter. The rise was mainly driven by higher trading income and underwriting revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.19 billion, up 7% on a year-over-year basis. Net revenues were $4.40 billion, increasing 4% from the prior-year quarter, driven by higher asset management revenues and net interest income, partly offset by a decline in transactional revenues.

Investment Management: Pre-tax income from continuing operations was $102 million, down 22% from the year-ago quarter. Net revenues were $653 million, a fall of 3% year over year. The decrease was mainly due toa fall in investment revenues, partly offset by higher asset management fees.

As of Sep 30, 2018, total assets under management or supervision were $471 billion, up 5% on a year-over-year basis.

Strong Capital Position

As of Sep 30, 2018, book value per share was $40.67, up from $38.87 as of Sep 30, 2017. Tangible book value per share was $35.50, up from $33.86 a year ago.

Morgan Stanley’s Tier 1 capital ratio Advanced (Fully Phased-in) was 19.7% compared with 19.1% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 17.3% compared with 16.7% a year ago.

Share Repurchase Update

During the reported quarter, Morgan Stanley bought back around 24 million shares for nearly $1.2billion. This was part of the company's 2018 capital plan.

Our Take

Morgan Stanley’s initiatives to offload its non-core assets to lower balance-sheet risks and focus on less capital-incentive operations like wealth management are commendable. Further, normalized level of trading activities and decent investment banking performance will likely support top-line growth. However, mounting operating expenses pose a concern.

Morgan Stanley Price, Consensus and EPS Surprise

 

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

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.

Among banking giants, JPMorgan JPM, Bank of America BAC and Citigroup C have already come out with third-quarter results. Performance of these companies was decent backed by modest loan growth, higher interest rates and lower tax rates.

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