Weak Trading Might Curb Morgan Stanley's (MS) Q4 Earnings

Morgan Stanley’s MS fourth-quarter and 2017 results, scheduled for Jan 18, are likely to witness a fall in trading income — one of the major revenue components. While this might majorly affect its earnings, an expected improvement in revenues from other segments, will likely offset the adverse impact to some extent.

The decline in trading revenues will primarily be due to comparison with the prior-year quarter that witnessed higher volatility following the U.S. Presidential election results. But trading activities remained sluggish in the to-be-reported quarter.

Several political and geopolitical developments, hike in interest rates, passage of the tax act and lack of any significant progress on the regulatory reforms proposed by the Trump administration should have incited volatility. However, subdued inflation in the United States and marginal increase in long-term interest rates along with absence of specific catalysts have been a drag.

Also, similar to the last couple of quarters, lower fixed income trading is expected to be largely responsible for lower trading revenues in the to-be-reported quarter. The Zacks Consensus Estimate for fixed income trading revenues of $1.12 billion reflects a decline of 3.9% sequentially and 23.6% from the year-ago quarter. On the other hand, the Zacks Consensus Estimate for equity trading revenues of $1.92 billion indicates a rise of 1.5% from the prior quarter. But the same is expected to fall 1.7% on a year-over-year basis.

Overall, fourth-quarter trading revenues are expected to be $2.86 billion, down 1.8% from the last quarter and 10.3% from the prior-year quarter.

Here are the other factors that might influence Morgan Stanley’s fourth-quarter results:

Underwriting fees to rise: Despite being the seasonally weak quarter for equity issuances globally, fourth-quarter 2017 is expected to be an exception. Strong rally in the equity markets across the world might have propelled IPOs and follow-on offerings. So, the related fees are projected to increase for Morgan Stanley. The Zacks Consensus Estimate for equity underwriting fees of $312 million reflects a surge of 38.7% from the prior-year quarter.

Further, as the interest rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. As debt origination fees account for more than half of Morgan Stanley’s total underwriting fees, this will lead to strong gains. The Zacks Consensus Estimate for debt underwriting fees of $440 million reflects year-over-year growth of 4.5%.

All in all, total underwriting fees are projected to witness a 14.4% year-over-year rise as the Zacks Consensus Estimate for the to-be-reported quarter is $752 million.

Modest rise in net interest income (NII): Rise in interest rates will likely lead to an increase in interest income. But overall loan demand remained weak — particularly in the areas of commercial and industrial and real estate. Therefore, NII is anticipated to witness slight growth.

Advisory fees to show weakness: Slowdown in M&A activity in terms of deals closed despite significant new M&As announced in the fourth quarter will have an adverse effect on advisory fees. Thus, Morgan Stanley is not likely to be untouched. The Zacks Consensus Estimate for advisory fees is $573 million, down 8.8% year over year.

Expense control to support bottom line: Morgan Stanley’s cost savings plan — Project Streamline — is likely to result in lower expenses during the quarter. Also, as much improvement in revenues is not likely, chances of a big increase in compensation expenses is low. Notably, the company expects to lower its expenses by $1 billion in 2017.

Adverse impact of new tax code: Following the passage of the tax act in December 2017, Morgan Stanley announced expectation of one-time charge of $1.4 billion in the fourth quarter related to write-down of certain net deferred tax assets. However, this will partially be offset by nearly $160 million net discrete tax benefit, mainly related to “the remeasurement of reserves and related interest relating to the status of multi-year Internal Revenue Service tax examinations.”

Therefore, the company is anticipated to record a net one-time charge of $1.25 billion in the to-be-reported quarter.

Here is what our quantitative model predicts:

Morgan Stanley does not have 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.

Zacks ESP: The Earnings ESP for Morgan Stanley is 0.00%.

Zacks Rank: Morgan Stanley carries a Zacks Rank #2 (Buy), which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Also, the Zacks Consensus Estimate for earnings of 77 cents reflects a 4.9% decline on a year-over-year basis. However, the Zacks Consensus Estimate for sales of $9.1 billion indicates 1.2% growth from the prior-year quarter.

Morgan Stanley Price and EPS Surprise

 

Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote

Stocks Worth a Look

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

BB&T Corporation BBT is slated to release results on Jan 18. It has an Earnings ESP of +0.33% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Bank of New York Mellon Corporation BK has an Earnings ESP of +0.16% and carries a Zacks Rank of 3. The company is also slated to release results on Jan 18.

SunTrust Banks, Inc. STI is scheduled to release results on Jan 19. It has an Earnings ESP of +0.81% and carries a Zacks Rank of 2.

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