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Weak Trading, Low Rates to Mar Morgan Stanley (MS) Q2 Earnings

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Morgan Stanley’s (MS - Free Report) second-quarter 2021 results, scheduled to be announced on Jul 15, are expected to reflect weak trading performance. Unlike the prior five quarters, wherein significant market volatility and client activity supported trading revenues, market normalization and reduced volatility are expected to have dampened overall trading business this time around. Thus, the company’s trading revenues (a major revenue component) are less likely to have offered significant support to its second-quarter 2021 overall performance.

Like the past few quarters, all major indexes — the S&P 500, Dow Jones and Nasdaq — have witnessed an upswing in the to-be-reported quarter and touched new highs. However, equity volumes are expected to have been negatively impacted because of the relatively low volatility. While the Federal Reserve’s bond-buying program is likely to have offered some support to fixed-income trading volumes, Morgan Stanley’s equity as well as fixed-income markets revenues are not expected to have improved much in the quarter under review.

The Zacks Consensus Estimate for equity trading revenues for the second quarter is pegged at $2.59 billion, which suggests a decline of 10.1% from the previous quarter’s reported number. Also, the consensus estimate for fixed-income trading revenues of $1.82 billion indicates a decline of 38.5% sequentially.

Other Key Factors Likely to Have Influenced Q2 Performance

Underwriting fees: Continuing the momentum, which started in the second half of 2020, the IPO market remained active in the to-be-reported quarter. Also, as companies kept building liquidity to tide over the pandemic-induced crisis, there was a rise in follow-up equity issuances. However, after a sizable incremental SPAC issuance activity over the past few quarters, the SPAC listings have declined substantially. Thus, growth in Morgan Stanley’s equity underwriting revenues is expected to have been muted in the to-be-reported quarter.

Amid near-zero interest rates and the Federal Reserve’s steady bond purchase program (that began in March 2020), bond issuance volumes were decent as companies took this as an opportunity to bolster their balance sheets. This is expected to have provided some support to Morgan Stanley’s debt underwriting fees, which account for more than 50% of its total underwriting fees.

The consensus estimate for fixed-income underwriting fees is pegged at $573 million, suggesting a decline of 9.2% from the prior quarter’s reported figure. The Zacks Consensus Estimate for equity underwriting fees of $1.01 billion indicates a fall of 32.6% sequentially.

The consensus estimate for total underwriting fees of $1.59 billion indicates a sequential fall of 25.6%.

Advisory income: After a remarkable performance over the past few quarters, deal-making continued at a rapid pace in second-quarter 2021 as deal volumes and total deal value recorded drastic improvement. This was largely driven by the brighter macroeconomic outlook, proposed tax rate hikes by President Joe Biden, substantially higher cash reserves, lower interest rates and the global roll-out of the COVID-19 vaccines.

Morgan Stanley’s position as one of the leading players in the space is likely to have provided leverage. Thus, the company’s advisory fee is expected to have been positively impacted in the to-be-reported quarter.

The consensus estimate for advisory fees is pegged at $552 million, suggesting a rise of 15% from the previous quarter’s reported number.

Net interest income (NII): Similar to the past quarters, the overall loan demand has been subdued in the second quarter of 2021 despite the re-opening of the economy. Nonetheless, commercial real estate and consumer loan portfolios offered some respite.

Thus, muted loan growth along with the continued low interest rate environment is likely to have hurt Morgan Stanley’s NII and net interest margin in the quarter. However, a slight steepening of the yield curve (the difference between short and long-term interest rates) is expected to have offered some support.

Expenses: Expense reduction, which has long been the main strategy of Morgan Stanley to remain profitable, is not likely to have been a major support in the second quarter. As the company continues to invest in franchise, overall costs are anticipated to have been elevated.

What Our Quantitative Model Predicts

According to our proven model, it cannot be conclusively predicted whether Morgan Stanley will be able to beat the Zacks Consensus Estimate this time. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Morgan Stanley is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Notably, the Zacks Consensus Estimate for the company’s second-quarter earnings has moved 1.8% lower to $1.63 over the past 30 days. The estimate suggests a 20.1% decline from the year-ago reported number. The consensus estimate for sales is pegged at $13.91 billion, which indicates a year-over-year rise of 3.7%.

Morgan Stanley Price and EPS Surprise

 

Morgan Stanley Price and EPS Surprise

Morgan Stanley price-eps-surprise | Morgan Stanley Quote

Stocks Worth a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

The Earnings ESP for Bank of America Corporation (BAC - Free Report) is +0.65% and it carries a Zacks Rank of 3 at present. The company is scheduled to report quarterly numbers on Jul 14.

The Bank Of New York Mellon (BK - Free Report) is slated to report quarterly results on Jul 15. The company currently has an Earnings ESP of +2.27% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BankUnited, Inc. (BKU - Free Report) is scheduled to release earnings numbers on Jul 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +1.04%.

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