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Will Trading Slump Hurt Morgan Stanley (MS) Q2 Earnings?

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Morgan Stanley (MS - Free Report) is slated to announce second-quarter 2017 results on Jul 19, before the opening bell. While investors cheered its enhanced capital deployment plan, we don’t think this optimism will continue following the earnings release.

While Morgan Stanley’s performance in the last quarter reflected improved trading revenues and higher investment banking fees, a challenging operating backdrop is expected to dampen the company’s second-quarter earnings.

Earnings estimate revisions depict pessimism too. The Zacks Consensus Estimate for the to-be-reported quarter was revised 2.5% downward, over the last seven days. Nonetheless, the company’s revenues and earnings are expected to grow modestly year over year.

Also, Morgan Stanley boasts a decent earnings surprise history. This is evident from the chart below:

Morgan Stanley Price and EPS Surprise

 

Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote

Earnings Whispers

Declining earnings estimates increase chances of a beat. However, our quantitative model doesn’t conclusively predict earnings beat this time. Here’s why:

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 chances 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%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 76 cents.

Zacks Rank: Morgan Stanley carries a Zacks Rank #4 (Sell).

As it is we caution investors against stocks with a Zacks Rank #4 or #5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.

Factors to Impact Q2 Results  

Trading income slump on low volatility: For the major part of the quarter, trading activities remained sluggish largely due to low volatility in both bond and equity markets. While the markets witnessed a modest increase in volatility almost at the end of quarter, it is not likely to be enough for Morgan Stanley to record any improvement in trading revenues.

Underwriting fees to record a slight rise: Driven by an improving market conditions, the second quarter witnessed an increase in equity issuance while debt issuance was hit by higher interest rates. Per the data compiled by Thomson Reuters, equity market activities led to more than nearly 22% rise in equity underwriting fees, with Morgan Stanley at the top spot (recording over 50% growth in fees).

However, the data indicates that global fees related to bond activity roughly totaled $6.5 billion during the second quarter, down more than 16% year over year. So, Morgan Stanley should have recorded a decline in debt underwriting fees during the quarter.

All in all, total underwriting fees is expected to witness a slight rise on the basis of improved equity markets.

Advisory fee revenues to suffer: Global M&A activity remained lackluster. Per the Thomson Reuters data, the total deal value of announced M&As across the world fell during the quarter. Thus, total fees earned through deal making should have declined as well. Likewise, Morgan Stanley is expected to earn $372.1 million as advisory fees in the quarter, indicating a fall of 20.9% from the prior-year quarter.

Slight rise in net interest income (NII) on loan growth: Improvement in loan demand, particularly commercial and industrial, and real estate during quarter is expected to support NII. Further, a rise in interest rates will likely lead to an increase in interest income as well.

Support to bottom line from expense control: Morgan Stanley has a cost savings plan – Project Streamline – in place. This 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.

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.

Comerica Incorporated (CMA - Free Report) is scheduled to report results on Jul 18. It has an Earnings ESP of +4.67% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Huntington Bancshares Incorporated (HBAN - Free Report) has an Earnings ESP of +4.35% and a Zacks Rank #3. It is scheduled to report second-quarter 2017 results on Jul 21.

The Earnings ESP for Zions Bancorporation (ZION - Free Report) is +1.61% and it carries a Zacks Rank #2. The company is scheduled to release results on Jul 25.

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