Back to top

Image: Bigstock

Morgan Stanley (MS) Tops Q3 Earnings, Wealth Management Aids

Read MoreHide Full Article

Impressive performance of wealth management division and higher investment banking fees drove Morgan Stanley’s (MS - Free Report) third-quarter 2017 earnings of 93 cents per share, which handily outpaced the Zacks Consensus Estimate of 81 cents. The reported figure was 15% above the prior-year quarter.

Shares of Morgan Stanley have gained nearly 1.7% in pre-market trading, largely driven by impressive investment banking performance. The stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

Higher underwriting fees (up 19%), stable equity trading income and an increase in advisory fees (up 10%) were largely responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.

However, as expected, fixed-income, currency and commodities (FICC) income declined (down 21%). Further, lower net interest income and a rise in operating expenses were the undermining factors.

Net income applicable to Morgan Stanley was $1.8 billion, up 12% year over year.

Rise in Investment Banking Aids Revenues, Costs Rise

Net revenues amounted to $9.2 billion, a rise of 3% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9 billion.

Net interest income was $783 million, down 22% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $8.4 billion grew 6% year over year, primarily supported by improvement in investments.

Total non-interest expenses were $6.7 billion, up 3% year over year. The rise was due to a 2% increase in compensation and benefits costs as well as 9% jump in other expenses.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.2 billion, down 11% year over year. Net revenues of $4.4 billion fell 4% from the prior-year quarter. The decline was mainly due to lower FICC income, partially offset by increase in underwriting income and advisory revenues as well as stable equity trading revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.1 billion, a jump of 24% on a year-over-year basis. Net revenues were $4.2 billion, up 9% year over year, driven by higher asset management fee revenues, net interest income and transactional revenues.

Investment Management: Pre-tax income from continuing operations was $131 million, jumping 35% from the year-ago quarter. Net revenues were $675 million, a rise of 22% year over year. The increase reflected higher investment revenues and asset management fees.

As of Sep 30, 2017, total assets under management or supervision were $447 billion, up 7% on a year-over-year basis.

Strong Capital Position

As of Sep 30, 2017, book value per share was $38.87, up from $37.11 as of Sep 30, 2016. Tangible book value per share was $33.86, up from $32.13 as of Sep 30, 2016.

Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 19.8%, up from 18.9% in the year-ago quarter. Tier 1 common equity ratio Advanced (Transitional) was 17.4% compared with 16.8% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 27 million shares for nearly $1.25 billion. This was part of the company's 2017 capital plan.

Our Take

Morgan Stanley’s initiatives to offload its non-core assets in order to lower balance-sheet risks and shift focus toward less capital-incentive operations like wealth management are commendable. Further, steady improvement in investment banking income will support its top line.

However, continued decline in interest income despite an improving rate scenario remains a near-term concern for Morgan Stanley. Also, decline in bond trading fees owing to low client activity is an issue.

Morgan Stanley Price, Consensus and EPS Surprise

Morgan Stanley Price, Consensus and EPS Surprise | Morgan Stanley Quote

Currently, Morgan Stanley has 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 Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) and Citigroup Inc. (C - Free Report) have already come out with their third-quarter results. The performance of these companies was impressive despite trading slump.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.   

See the pot trades we're targeting>>