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Morgan Stanley (MS) Tops Q4 Earnings; Bond Trading Triples
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Impressive bond trading drove Morgan Stanley’s (MS - Free Report) fourth-quarter 2016 earnings from continuing operations of 81 cents per share, which handily surpassed the Zacks Consensus Estimate of 65 cents. Further, this shows an 88% surge from the prior-year quarter, which excludes DVA. Results in the reported quarter include net discrete tax benefits of $135 million.
Shares of Morgan Stanley gained nearly 2% in pre-market trading, largely driven by a massive rise in fixed-income, currency and commodities (“FICC”) trading income. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.
A drastic surge in bond trading revenues, along with modest growth in equity trading revenues, was primarily responsible for significant improvement in earnings. Further, higher bond underwriting fees and advisory revenues supported the results. Also, the company’s capital ratios remained strong.
However, weakness in equity underwriting income (due to weak IPO market) and lower net interest income (owing to a fall in corporate loans) were the downsides. Moreover, a rise in compensation costs resulted in higher operating expenses.
Net income applicable to Morgan Stanley was $1.7 billion, up 83% year over year.
Improvement in Trading Supports Revenue, Costs Flared Up
Net revenue amounted to $9.0 billion, a jump of 17% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $8.5 billion.
Net interest income was $883 million, down 15% from the year-ago quarter. This was largely due to a drastic rise in interest expense. On the other hand, total non-interest revenue of $8.1 billion grew 21% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.8 billion, up 8% year over year. The rise came on the back of a 12% improvement in compensation and benefits.
Quarterly Segmental Performance
Institutional Securities (IS): Pre-tax income from continuing operations was $1.3 billion, up 142% year over year. Net revenue of $4.6 billion rose 35% from the prior-year quarter. The improvement was primarily attributable to a significant increase in FICC income, higher equity trading revenue and advisory revenues, partly offset by lower underwriting fees.
Wealth Management (WM): Pre-tax income from continuing operations totaled $891 million, an increase of 16% on a year-over-year basis. Net revenue was $4 billion, up 6% year over year, driven by higher asset management fee revenues and net interest income. These were, nevertheless, partially countered by a fall in transactional revenues.
Investment Management (IM): Pre-tax income from continuing operations was $28 million, tanking 77% from the year-ago quarter. Net revenue was $500 million, a fall of 19% year over year. The decline reflected losses on sales and markdowns of legacy LP investments in third party sponsored funds.
As of Dec 31, 2016, total assets under management or supervision were $417 billion, up 3% on a year-over-year basis.
Strong Capital Position
As of Dec 31, 2016, book value per share was $36.99, up from $35.24 as of Dec 31, 2015. Tangible book value per share was $31.98, up from $30.26 as of Dec 31, 2015.
Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 19.0%, up from 17.4% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 16.8%, up from 15.5% in the prior-year quarter.
Share Repurchases
During the reported quarter, Morgan Stanley bought back around 27 million shares for nearly $1.0 billion. This was part of the share buyback program announced by the company, under which shares worth up to $3.5 billion can be repurchased through second-quarter 2017.
Our Take
Impressive jump in FICC trading was the highlight of the recently concluded quarter, boosting Morgan Stanley’s results. Further, an improvement in investment banking remained a tailwind. Moreover, Morgan Stanley’s initiatives to offload its non-core assets, in order to lower balance-sheet risks and shift focus toward less capital-incentive IM and WM segments are commendable.
Among other banking giants, JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Wells Fargo & Company (WFC - Free Report) , have already come out with their fourth-quarter and 2016 results. The performances of these companies have been encouraging.
Zacks' Top 10 Stocks for 2017
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Morgan Stanley (MS) Tops Q4 Earnings; Bond Trading Triples
Impressive bond trading drove Morgan Stanley’s (MS - Free Report) fourth-quarter 2016 earnings from continuing operations of 81 cents per share, which handily surpassed the Zacks Consensus Estimate of 65 cents. Further, this shows an 88% surge from the prior-year quarter, which excludes DVA. Results in the reported quarter include net discrete tax benefits of $135 million.
Shares of Morgan Stanley gained nearly 2% in pre-market trading, largely driven by a massive rise in fixed-income, currency and commodities (“FICC”) trading income. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.
A drastic surge in bond trading revenues, along with modest growth in equity trading revenues, was primarily responsible for significant improvement in earnings. Further, higher bond underwriting fees and advisory revenues supported the results. Also, the company’s capital ratios remained strong.
However, weakness in equity underwriting income (due to weak IPO market) and lower net interest income (owing to a fall in corporate loans) were the downsides. Moreover, a rise in compensation costs resulted in higher operating expenses.
Net income applicable to Morgan Stanley was $1.7 billion, up 83% year over year.
Improvement in Trading Supports Revenue, Costs Flared Up
Net revenue amounted to $9.0 billion, a jump of 17% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $8.5 billion.
Net interest income was $883 million, down 15% from the year-ago quarter. This was largely due to a drastic rise in interest expense. On the other hand, total non-interest revenue of $8.1 billion grew 21% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.8 billion, up 8% year over year. The rise came on the back of a 12% improvement in compensation and benefits.
Quarterly Segmental Performance
Institutional Securities (IS): Pre-tax income from continuing operations was $1.3 billion, up 142% year over year. Net revenue of $4.6 billion rose 35% from the prior-year quarter. The improvement was primarily attributable to a significant increase in FICC income, higher equity trading revenue and advisory revenues, partly offset by lower underwriting fees.
Wealth Management (WM): Pre-tax income from continuing operations totaled $891 million, an increase of 16% on a year-over-year basis. Net revenue was $4 billion, up 6% year over year, driven by higher asset management fee revenues and net interest income. These were, nevertheless, partially countered by a fall in transactional revenues.
Investment Management (IM): Pre-tax income from continuing operations was $28 million, tanking 77% from the year-ago quarter. Net revenue was $500 million, a fall of 19% year over year. The decline reflected losses on sales and markdowns of legacy LP investments in third party sponsored funds.
As of Dec 31, 2016, total assets under management or supervision were $417 billion, up 3% on a year-over-year basis.
Strong Capital Position
As of Dec 31, 2016, book value per share was $36.99, up from $35.24 as of Dec 31, 2015. Tangible book value per share was $31.98, up from $30.26 as of Dec 31, 2015.
Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 19.0%, up from 17.4% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 16.8%, up from 15.5% in the prior-year quarter.
Share Repurchases
During the reported quarter, Morgan Stanley bought back around 27 million shares for nearly $1.0 billion. This was part of the share buyback program announced by the company, under which shares worth up to $3.5 billion can be repurchased through second-quarter 2017.
Our Take
Impressive jump in FICC trading was the highlight of the recently concluded quarter, boosting Morgan Stanley’s results. Further, an improvement in investment banking remained a tailwind. Moreover, Morgan Stanley’s initiatives to offload its non-core assets, in order to lower balance-sheet risks and shift focus toward less capital-incentive IM and WM segments are commendable.
Currently, Morgan Stanley sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Morgan Stanley Price, Consensus and EPS Surprise
Morgan Stanley Price, Consensus and EPS Surprise | Morgan Stanley Quote
Among other banking giants, JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Wells Fargo & Company (WFC - Free Report) , have already come out with their fourth-quarter and 2016 results. The performances of these companies have been encouraging.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>