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Neutral Stance on Morgan Stanley


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On Sep 5, we reiterated our long-term recommendation on major global bank Morgan Stanley (MS - Analyst Report) at Neutral. This was based on the company’s better-than-expected second-quarter results. However, continuous rise in operating expenses remain a cause of concern.

Why Neutral?

Morgan Stanley’s adjusted second-quarter 2013 earnings from continuing operations substantially outpaced the Zacks Consensus Estimate. Results were mainly driven by an increase in revenues, partially offset by higher operating expenses. An improved asset position and stable capital ratios were the other highlights for the quarter.

Further, Morgan Stanley’s acquisition of the remaining 35% stake in Morgan Stanley Wealth Management (MSWM) – its joint venture with Citigroup Inc. (C - Analyst Report) – led to the formation of one of the largest retail platforms. Though this adversely impacted the company’s second-quarter earnings, it liquidated additional capital. Hence, the company received the Federal Reserve’s consent to repurchase shares worth $500 million.

However, Morgan Stanley’s profitability will likely be affected by the financial reform law, which will lead to higher costs and fee restrictions. Further, competitive pressure is expected to affect the company’s revenue growth prospects as its peers may seek to obtain market share by reducing prices.

The Zacks Consensus Estimate for 2013 has remained stable at $2.11 per share over the last 60 days. The Zacks Consensus Estimate for 2014 has nudged up 1.5% to $2.63 per share, over the same time period. Thus, Morgan Stanley now has a Zacks Rank #3 (Hold).

Stocks That Warrant a Look

Some major global banks that are performing better include Wells Fargo & Company (WFC - Analyst Report) and The Goldman Sachs Group, Inc. (GS - Analyst Report). Both these stocks carry a Zacks Rank #2 (Buy).

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