Morgan Stanley (MS) Tops Q2 Earnings on Higher Trading Fees

Higher-than-expected trading income and decent investment banking performance drove Morgan Stanley’s MS second-quarter 2018 earnings of $1.30 per share, which easily surpassed the Zacks Consensus Estimate of $1.08. The figure reflected 49% surge from the prior-year quarter.

Excluding net discrete tax benefits of $88 million in the reported quarter, adjusted earnings were $1.25 per share.

Shares of Morgan Stanley have gained nearly 3% in pre-market trading. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

Surprisingly, both equity trading income (up 15%) and fixed income, currency and commodities income (up 12%) witnessed improvement during the quarter. Also, increase in equity underwriting fees (up 34%), advisory income (up 23%) and net interest income acted as tailwinds. Further, debt underwriting revenues rose 7%.

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

Net income applicable to Morgan Stanley was $2.4 billion, up 39% year over year.

Trading, Investment Banking Aid Revenues, Costs Rise

Net revenues amounted to $10.6 billion, a rise of 12% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $10 billion.

Net interest income was $906 million, jumping 21% 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 $9.7 billion grew 11% year over year, primarily supported by improvement in trading and investment banking.

Total non-interest expenses were $7.5 billion, up 9% year over year.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.8 billion, increasing 26% year over year. Net revenues of $5.7 billion grew 20% from the prior-year quarter. The rise was mainly driven by higher trading income, advisory revenues and equity underwriting revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.2 billion, up 9% on a year-over-year basis. Net revenues were $4.3 billion, increasing 4% from the prior-year quarter, driven by higher asset management fee revenues and net interest income, partly offset by a decline in transactional revenues.

Investment Management: Pre-tax income from continuing operations was $140 million, down 1% from the year-ago quarter. Net revenues were $691 million, a rise of 4% year over year. The increase reflected higher asset management fees, partly offset by a fall in investment revenues.

As of Jun 30, 2018, total assets under management or supervision were $474 billion, up 9% on a year-over-year basis.

Strong Capital Position

As of Jun 30, 2018, book value per share was $40.34, up from $38.22 as of Jun 30, 2017. Tangible book value per share was $35.19, up from $33.24 a year ago.

Morgan Stanley’s Tier 1 capital ratio Advanced (Fully Phased-in) was 18.9% compared with 18.2% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 16.5% compared with 16.0% a year ago.

Capital Deployment Update

During the reported quarter, Morgan Stanley bought back around 24 million shares for nearly $1.25 billion. This was part of the company's 2017 capital plan.

Further, following the Federal Reserve’s approval of its capital plan, Morgan Stanley announced a 20% hike in quarterly dividend to 30 cents per share. Further, the company authorized $4.7 billion worth of share buyback plan.

Our Take

Morgan Stanley’s initiatives to offload its non-core assets to lower balance-sheet risks and shift 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 remain 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 second-quarter results. Performance of these companies was impressive, given the better-than-expected trading performance, modest loan growth, higher interest rates and lower tax rates.

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