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Morgan Stanley (MS) Q4 Earnings, Revenues Lag on Trading Woe

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Weak trading and underwriting performance affected Morgan Stanley’s (MS - Free Report) fourth-quarter 2018 adjusted earnings of 73 cents per share, which lagged the Zacks Consensus Estimate of 90 cents. The figure also reflected 13% decline from the prior-year quarter.

Shares of Morgan Stanley have declined more than 4% in pre-market trading. Notably, the stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

Dismal underwriting (both equity and fixed income) revenues (down 25%) and fixed income trading revenues (down 30%) hurt Morgan Stanley’s quarterly results. Additionally, net interest income recorded a fall.

However, stable equity trading income and improvement in advisory revenues (up 41%) acted as tailwinds. Further, operating expenses witnessed a decline. Also, the company’s capital ratios remained strong.

Net income applicable to Morgan Stanley was $1.53 billion, up substantially from $643 million in the prior-year quarter.

In 2018, adjusted earnings of $4.61 per share missed the Zacks Consensus Estimate of $4.86. However, the figure was up 28% year over year. Net income applicable to Morgan Stanley was $8.74 billion, up 43%.

Trading, Investment Banking Hurt Revenues, Costs Down

Net revenues amounted to $8.54 billion, a decline of 10% from the prior-year quarter. In addition, the top line lagged the Zacks Consensus Estimate of $9.44 billion.

In 2018, net revenues rose 6% year over year to $40.11 billion. However, it marginally missed the Zacks Consensus Estimate of $40.99 billion.

Net interest income was $989 million, down 1% from the year-ago quarter. This was largely due to a rise in interest expenses, partially offset by higher interest income.

Total non-interest revenues of $7.56 billion fell 11% year over year, primarily due to dismal investment banking and trading performance.

Total non-interest expenses were $6.69 billion, down 5% year over year.

Quarterly Segmental Performance Disappoints

Institutional Securities: Pre-tax income from continuing operations was $780 million, decreasing 37% year over year. Net revenues of $3.84 billion fell 15%. The decline was mainly due to lower trading income and underwriting revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.1 billion, down 12% on a year-over-year basis. Net revenues were $4.14 billion, decreasing 6% due to a decline in transactional revenues, partly offset by higher asset management revenues and net interest income.

Investment Management: Pre-tax income from continuing operations was $74 million, down 8% from the year-ago quarter. Net revenues were $684 million, up 5%. The increase was mainly driven by higher asset management fees, partially offset by fall in investment revenues.

As of Dec 31, 2018, total assets under management or supervision were $463 billion, down 4% on a year-over-year basis.

Strong Capital Position

As of Dec 31, 2018, book value per share was $42.20, up from $38.52 as of Dec 31, 2017. Tangible book value per share was $36.99, up from $33.46 a year ago.

Morgan Stanley’s Tier 1 capital ratio Advanced (Fully Phased-in) was 19.4% compared with 19.3% in the year-ago quarter. Tier 1 common equity ratio Advanced (Fully Phased-in) was 17.0% compared with 16.9% a year ago.

Share Repurchase Update

During the reported quarter, Morgan Stanley bought back around 27 million shares for nearly $1.2 billion. This was part of the company's 2018 capital plan.

Our Take

Morgan Stanley’s initiatives to offload its non-core assets to lower balance-sheet risks and focus on less capital-incentive operations like wealth management are commendable. Further, normalized level of trading activities and decent investment banking performance will likely support top-line growth. However, mounting operating expenses pose a concern.

Morgan Stanley Price, Consensus and EPS Surprise

 

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

Currently, 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 fourth-quarter results. Similar to Morgan Stanley, financials of these companies was hurt by disappointing investment banking performance.

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