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Morgan Stanley (MS) Q1 Earnings Beat on Trading Rebound

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Trading rebound, higher interest income and improvement in advisory fees drove Morgan Stanley’s (MS - Free Report) first-quarter 2018 earnings of $1.45 per share, which handily surpassed the Zacks Consensus Estimate of $1.28. The reported figure was 45% above the prior-year quarter.

Shares of Morgan Stanley have gained more than 2.5% in pre-market trading. It appears that investors are encouraged with its solid trading revenues and a decent investment banking   performance. Nonetheless, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

As expected, both equity trading income (up 27%) and fixed income, currency and commodities income (up 8%) supported revenue growth. Further, equity underwriting fees (up 8%), advisory income (up 16%) and net interest income acted as tailwinds. Also, the company’s capital ratios remained strong.

However, lower debt underwriting fees (down 2%) was an undermining factor. Moreover, operating expenses recorded a rise.

Net income applicable to Morgan Stanley was $2.7 billion, up 38% year over year.

Rise in Trading Income Aids Revenues, Costs Rise

Net revenues amounted to $11.1 billion, a rise of 14% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $10.5 billion.

Net interest income was $975 million, jumping 26% from the year-ago quarter. This was largely driven by a rise in interest income.

Also, total non-interest revenues of $10.1 billion grew 13% year over year, primarily supported by improvement in trading.

Total non-interest expenses were $7.7 billion, up 10% year over year.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $2.1 billion, increasing 22% year over year. Net revenues of $6.1 billion grew 18% from the prior-year quarter. The rise was mainly driven by higher trading income, advisory revenues and equity underwriting revenues, partially offset by lower debt underwriting income.

Wealth Management: Pre-tax income from continuing operations totaled $1.2 billion, up 19% on a year-over-year basis. Net revenues were $4.4 billion, increasing 8% from the prior-year quarter, driven by higher asset management fee revenues and net interest income, partly offset by a decline in transactional revenues.

Investment Management: Pre-tax income from continuing operations was $148 million, surging 44% from the year-ago quarter. Net revenues were $718 million, a rise of 18% year over year. The increase reflected higher asset management fees, partly offset by fall in investment revenues.

As of Mar 31, 2018, total assets under management or supervision were $469 billion, up 11% on a year-over-year basis.

Strong Capital Position

As of Mar 31, 2018, book value per share was $39.19, up from $37.48 as of Mar 31, 2017. Tangible book value per share was $34.04, up from $32.49 as of Mar 31, 2017.

Morgan Stanley’s Tier 1 capital ratio Advanced (Fully Phased-in) was 18.4% compared with 19.0% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 16.1% compared with 16.6% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 22 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 to lower balance-sheet risks and shift focus on less capital-incentive operations like wealth management are commendable. Further, rebound in trading activities will likely support top-line growth.

However, dismal investment banking performance is a concern. This is expected to have an adverse impact on the company’s revenues.

Morgan Stanley Price, Consensus and EPS Surprise

 

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

Morgan Stanley carries 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 (JPM - Free Report) , Bank of America (BAC - Free Report) and Citigroup (C - Free Report) have already come out with first-quarter results. Performance of these companies was impressive, given the rebound in trading activities, modest loan growth, higher interest rates and lower tax rates.

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