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Zacks Industry Outlook Highlights: Morgan Stanley, Charles Schwab, Goldman Sachs and Interactive Brokers Group
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For Immediate Release
Chicago, IL – October 5, 2021 – Today, Zacks Equity Research discusses Investment Banking, including Morgan Stanley (MS - Free Report) , The Charles Schwab Corporation (SCHW - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) and Interactive Brokers Group, Inc. (IBKR - Free Report) .
The Zacks Investment Bank industry is supported by market volatility-driven growth in the trading business, which might not continue for long as volatility is likely to wane once the pandemic and resultant issues stabilize. Costs related to technological upgrades and business diversification might impede bottom-line growth.
Yet, the industry players will gain from solid initial public offerings (IPOs) and deal-making activities, which will keep supporting revenues. Consolidation is a catalyst as well. So, the companies like Morgan Stanley, Charles Schwab, Goldman Sachs and Interactive Brokers Group will benefit.
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments, and financial institutions across the globe. These initially started as partnership firms focused on IPOs, secondary market offerings, brokerage, and mergers and acquisitions (M&As).
Now, gradually these companies have evolved into providers of various other services, including securities research, proprietary trading, and investment management. Therefore, the industry players work mainly through three product segments — investment banking (which comprises M&As, advisory services, and securities underwriting), asset management, and trading and principal investments (which consists of proprietary and brokerage trading).
4 Themes for Solid Future of Investment Bank Industry
Investment Banking Business to Keep Prospering: M&A activities have been witnessing robust momentum since June 2020-end. The uptrend is likely to continue in the near term on resumption of normal business, excess cash levels, appetite for improving scale and market share, and solid economic recovery.
Heightened IPO activities and follow-on equity issuances, driven by strong equity markets performance, along with improvement in debt markets (mainly due to low rates and the Federal Reserve’s bond buying program), are likely to continue in the quarters ahead. Thus, solid underwriting and advisory businesses are expected to keep supporting investment banks’ financials.
Technological Upgrades: Innovative trading platforms, investments in technology and advertising are likely to support the overall operations of investment banks. The industry players are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms.
Consolidation the Way Forward: The tough operating backdrop that the industry players faced in the pre-pandemic era seems to have made way for solid consolidation efforts in recent days. The need to strengthen product offerings in new markets (both domestic and international), along with technological advancement and revenue diversification, is keeping investment banks on their toes.
Instead of starting from scratch, the companies are taking advantage of solid liquidity positions to partner/acquire providers of such products and services. Over the past couple of years, Morgan Stanley, Schwab, Goldman, and many others have taken this route.
Trading Continue to ‘Normalize’: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. While the COVID-19 pandemic and subsequent mayhem had resulted in extreme volatility in the markets last year, things are gradually normalizing since the second quarter of 2021.
Despite this, extensive administrative and monetary support has led to substantial cash in hand for investors, thus they continue to look for an attractive entry point. So, the trading business is expected to continue supporting investment banks’ top-line growth.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Investment Bank industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #113, which places it in the top 45% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a stellar earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually building up confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have moved 22% upward.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While the stocks in the industry have collectively gained 80.4%, the S&P 500 composite has rallied 29.7% and the Zacks Finance sector has gained 37.9%.
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.49X, above the median level of 2.40X, over the past five years. This compares with the highest level of 3.89X and the lowest level of 1.34X over this period. However, the industry is trading at a discount, when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 16.47X and the median level is 11.11X.
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.33X and the median level of 3.67X for the same period are above the Zacks Investment Bank industry’s respective ratios.
4 Investment Banks to Keep an Eye On
Morgan Stanley: This Zacks Rank #2 (Buy) stock operates as an investment banking, securities, and investment management company globally. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification.
Morgan Stanley has been undertaking several initiatives to restructure operations, with a goal to increase reliable revenue sources. The recent buyouts of Eaton Vance and E*Trade Financial are in sync with its efforts to focus less on capital markets driven revenue mix.
Though steadily increasing expenses and low rates make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, the company’s robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $180.7 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have jumped 103.8% over the past year. The Zacks Consensus Estimate for 2021 earnings has moved up almost 1% to $7.53 over the past 30 days.
Charles Schwab: Headquartered in San Francisco, CA, Charles Schwab is a savings and loan holding company, providing wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. The company remains focused on enhancing trading revenues.
For this, it continues to undertake several efforts including lowering trading commission to zero and reducing trading fees on several other products. These initiatives, aimed at building a client base, along with the acquisition of TD Ameritrade, are likely to lead to further improvement in trading income.
The company’s net interest margin is expected to remain strained as the Fed has signaled no change in the near-zero interest rates anytime soon. However, aggressive efforts to fortify its client base in advisory solutions as well as the acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and the buyout of Motif’s technology and intellectual property have further strengthened Schwab's position and helped diversify revenues.
The Zacks Consensus Estimate for 2021 earnings has moved marginally north to $3.15 over the past month. The stock, presently carrying a Zacks Rank of 2, has surged 101.5% over the past year. It has a market cap of $134.5 billion.
Goldman: This Zacks Rank #3 (Hold) company is a leading global provider of investment banking, securities, investment management, and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong, and other major financial centers globally.
Similar to Morgan Stanley, the key to the company’s financial stability is its business diversification initiatives. Goldman has been undertaking efforts to boost asset management and wealth management business (both in the United States and globally) while expanding its digital consumer banking platform.
In September, the company announced a deal to acquire GreenSky, Inc., which it plans to align with its online consumer banking platform, Marcus by Goldman Sachs. Earlier in August, in a bid to bolster its European distribution and fund management capabilities, it entered an agreement to buy NN Investment Partners from NN Group N.V.
A solid position in announced and completed M&As globally is likely to drive Goldman's investment banking revenues. Further, backed by a solid capital position, the company has consistently enhanced shareholders’ value with steady capital deployment activities.
Goldman has a market cap of $128.1 billion. Over the past year, shares of the company have soared 88.3%. The Zacks Consensus Estimate for ongoing-year earnings has moved approximately 1% north to $53.17 in the past 30 days.
Interactive Brokers: This Zacks Rank #3 company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, besides executing and processing trades in securities, futures, foreign exchange instruments, bonds, and mutual funds on more than 135 electronic exchanges and market centers worldwide.
Since its inception, Interactive Brokers has been chiefly focusing on developing proprietary software to automate broker-dealer functions, which has resulted in steady top-line improvement. Also, innovative products as well as the acquisition of the retail unit of Folio Investments are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses act as a deterrent, the company continues to explore opportunities in the emerging markets of Taiwan, Mexico, and India to diversify its operations and gain revenue stability. Further, the company has received authorization from the Central Bank of Ireland to set up a new entity in the nation. In December 2020 Interactive Brokers said that given the rapid growth of its European business, it “expects to expand its staffing substantially over the next year.”
Shares of the company, which has a market cap of $27 billion, have rallied 30.1% over the past year. The Zacks Consensus Estimate for ongoing-year earnings has moved slightly north to $3.13 for 2021 in the past 30 days.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: Morgan Stanley, Charles Schwab, Goldman Sachs and Interactive Brokers Group
For Immediate Release
Chicago, IL – October 5, 2021 – Today, Zacks Equity Research discusses Investment Banking, including Morgan Stanley (MS - Free Report) , The Charles Schwab Corporation (SCHW - Free Report) , The Goldman Sachs Group, Inc. (GS - Free Report) and Interactive Brokers Group, Inc. (IBKR - Free Report) .
Link: https://www.zacks.com/commentary/1804259/4-investment-banks-to-watch-out-for-in-the-buoyant-industry
The Zacks Investment Bank industry is supported by market volatility-driven growth in the trading business, which might not continue for long as volatility is likely to wane once the pandemic and resultant issues stabilize. Costs related to technological upgrades and business diversification might impede bottom-line growth.
Yet, the industry players will gain from solid initial public offerings (IPOs) and deal-making activities, which will keep supporting revenues. Consolidation is a catalyst as well. So, the companies like Morgan Stanley, Charles Schwab, Goldman Sachs and Interactive Brokers Group will benefit.
Industry Description
The Zacks Investment Bank industry consists of firms that provide financial products and services that include advisory-based financial transactions to corporations, governments, and financial institutions across the globe. These initially started as partnership firms focused on IPOs, secondary market offerings, brokerage, and mergers and acquisitions (M&As).
Now, gradually these companies have evolved into providers of various other services, including securities research, proprietary trading, and investment management. Therefore, the industry players work mainly through three product segments — investment banking (which comprises M&As, advisory services, and securities underwriting), asset management, and trading and principal investments (which consists of proprietary and brokerage trading).
4 Themes for Solid Future of Investment Bank Industry
Investment Banking Business to Keep Prospering: M&A activities have been witnessing robust momentum since June 2020-end. The uptrend is likely to continue in the near term on resumption of normal business, excess cash levels, appetite for improving scale and market share, and solid economic recovery.
Heightened IPO activities and follow-on equity issuances, driven by strong equity markets performance, along with improvement in debt markets (mainly due to low rates and the Federal Reserve’s bond buying program), are likely to continue in the quarters ahead. Thus, solid underwriting and advisory businesses are expected to keep supporting investment banks’ financials.
Technological Upgrades: Innovative trading platforms, investments in technology and advertising are likely to support the overall operations of investment banks. The industry players are emphasizing on attracting and retaining the best talent for building a leadership team and spending on technology to support clients with the development of infrastructure and new platforms.
Consolidation the Way Forward: The tough operating backdrop that the industry players faced in the pre-pandemic era seems to have made way for solid consolidation efforts in recent days. The need to strengthen product offerings in new markets (both domestic and international), along with technological advancement and revenue diversification, is keeping investment banks on their toes.
Instead of starting from scratch, the companies are taking advantage of solid liquidity positions to partner/acquire providers of such products and services. Over the past couple of years, Morgan Stanley, Schwab, Goldman, and many others have taken this route.
Trading Continue to ‘Normalize’: Client activity in the trading business largely depends on the prevalent macroeconomic and geopolitical conditions. While the COVID-19 pandemic and subsequent mayhem had resulted in extreme volatility in the markets last year, things are gradually normalizing since the second quarter of 2021.
Despite this, extensive administrative and monetary support has led to substantial cash in hand for investors, thus they continue to look for an attractive entry point. So, the trading business is expected to continue supporting investment banks’ top-line growth.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Investment Bank industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #113, which places it in the top 45% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a stellar earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually building up confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have moved 22% upward.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Investment Bank industry has outperformed its sector and the S&P 500 over the past year. While the stocks in the industry have collectively gained 80.4%, the S&P 500 composite has rallied 29.7% and the Zacks Finance sector has gained 37.9%.
Industry Valuation
One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), which is commonly used for valuing banks because of large variations in their earnings results from one quarter to the next.
The industry currently has a trailing 12-month P/TBV of 3.49X, above the median level of 2.40X, over the past five years. This compares with the highest level of 3.89X and the lowest level of 1.34X over this period. However, the industry is trading at a discount, when compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 16.47X and the median level is 11.11X.
As finance stocks typically have a lower P/TBV ratio, comparing investment banks with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of the broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV ratio of 4.33X and the median level of 3.67X for the same period are above the Zacks Investment Bank industry’s respective ratios.
4 Investment Banks to Keep an Eye On
Morgan Stanley: This Zacks Rank #2 (Buy) stock operates as an investment banking, securities, and investment management company globally. Based in New York, the key source of Morgan Stanley’s earnings stability is its business diversification.
Morgan Stanley has been undertaking several initiatives to restructure operations, with a goal to increase reliable revenue sources. The recent buyouts of Eaton Vance and E*Trade Financial are in sync with its efforts to focus less on capital markets driven revenue mix.
Though steadily increasing expenses and low rates make us apprehensive, a strong balance sheet and investment-grade long-term credit ratings from leading credit rating agencies are likely to continue supporting growth. Also, the company’s robust capital deployments reflect a solid liquidity position and will keep enhancing shareholder value.
With a market cap of $180.7 billion, Morgan Stanley is expected to continue benefiting from its scale and business expansion efforts. Its shares have jumped 103.8% over the past year. The Zacks Consensus Estimate for 2021 earnings has moved up almost 1% to $7.53 over the past 30 days.
Charles Schwab: Headquartered in San Francisco, CA, Charles Schwab is a savings and loan holding company, providing wealth management, securities brokerage, banking, asset management, custody, and financial advisory services. The company remains focused on enhancing trading revenues.
For this, it continues to undertake several efforts including lowering trading commission to zero and reducing trading fees on several other products. These initiatives, aimed at building a client base, along with the acquisition of TD Ameritrade, are likely to lead to further improvement in trading income.
The company’s net interest margin is expected to remain strained as the Fed has signaled no change in the near-zero interest rates anytime soon. However, aggressive efforts to fortify its client base in advisory solutions as well as the acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and the buyout of Motif’s technology and intellectual property have further strengthened Schwab's position and helped diversify revenues.
The Zacks Consensus Estimate for 2021 earnings has moved marginally north to $3.15 over the past month. The stock, presently carrying a Zacks Rank of 2, has surged 101.5% over the past year. It has a market cap of $134.5 billion.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Goldman: This Zacks Rank #3 (Hold) company is a leading global provider of investment banking, securities, investment management, and consumer banking services. Based in New York, Goldman has offices in London, Frankfurt, Tokyo, Hong Kong, and other major financial centers globally.
Similar to Morgan Stanley, the key to the company’s financial stability is its business diversification initiatives. Goldman has been undertaking efforts to boost asset management and wealth management business (both in the United States and globally) while expanding its digital consumer banking platform.
In September, the company announced a deal to acquire GreenSky, Inc., which it plans to align with its online consumer banking platform, Marcus by Goldman Sachs. Earlier in August, in a bid to bolster its European distribution and fund management capabilities, it entered an agreement to buy NN Investment Partners from NN Group N.V.
A solid position in announced and completed M&As globally is likely to drive Goldman's investment banking revenues. Further, backed by a solid capital position, the company has consistently enhanced shareholders’ value with steady capital deployment activities.
Goldman has a market cap of $128.1 billion. Over the past year, shares of the company have soared 88.3%. The Zacks Consensus Estimate for ongoing-year earnings has moved approximately 1% north to $53.17 in the past 30 days.
Interactive Brokers: This Zacks Rank #3 company operates as an automated global electronic market maker and broker. The company, based in Greenwich, CT, specializes in routing orders, besides executing and processing trades in securities, futures, foreign exchange instruments, bonds, and mutual funds on more than 135 electronic exchanges and market centers worldwide.
Since its inception, Interactive Brokers has been chiefly focusing on developing proprietary software to automate broker-dealer functions, which has resulted in steady top-line improvement. Also, innovative products as well as the acquisition of the retail unit of Folio Investments are expected to strengthen the company’s position in the online brokerage space.
Though rising expenses act as a deterrent, the company continues to explore opportunities in the emerging markets of Taiwan, Mexico, and India to diversify its operations and gain revenue stability. Further, the company has received authorization from the Central Bank of Ireland to set up a new entity in the nation. In December 2020 Interactive Brokers said that given the rapid growth of its European business, it “expects to expand its staffing substantially over the next year.”
Shares of the company, which has a market cap of $27 billion, have rallied 30.1% over the past year. The Zacks Consensus Estimate for ongoing-year earnings has moved slightly north to $3.13 for 2021 in the past 30 days.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.