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Morgan Stanley (MS) Stock Gains on Q3 Earnings Beat, Costs Up

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Morgan Stanley’s (MS - Free Report) third-quarter 2021 adjusted earnings of $2.04 per share easily outpaced the Zacks Consensus Estimate of $1.70. The bottom line reflects a rise of 22.9% from the year-ago quarter’s level.

The stock moved up 2.1% in pre-market trading. Notably, the full-day trading session will display a clearer picture.

As anticipated, Morgan Stanley’s trading business did not perform significantly well. Fixed income trading revenues declined 16.1% year over year, while equity trading income rose 24.4%.

The performance of the investment banking (“IB”) business was strong. Equity underwriting fees increased 15.6% from the prior-year quarter’s level, while fixed income underwriting rose 19.1%. Advisory fees were up significantly. Therefore, IB fees improved 66.9%.

Higher net interest income, mainly driven by a rise in total loan balance (up 22%) and a plunge in interest expenses supported the top line.

However, mounting operating expenses hurt the results to some extent.

The reported quarter’s results include the impacts of the acquisitions of Eaton Vance Corp. (closed in March 2021) and E*TRADE Financial Corporation (October 2020).

Including the integration-related expenses related to the E*Trade Financial and Eaton Vance deals, net income applicable to common shareholders was $3.6 billion, up 38% from the year-ago quarter’s number.

Revenues Improve, Expenses Rise

Net revenues were $14.8 billion, up 25.9% from the prior-year quarter. The top line surpassed the Zacks Consensus Estimate of $13.85 billion.

Net interest income was $2.1 billion, up 38.8% from the year-ago quarter. This upside was largely due to a 49% decline in interest expenses.

Total non-interest revenues of $12.7 billion increased 24% year over year.

Total non-interest expenses were $9.9 billion, up 21.3% year over year.

Provision for credit losses was $24 million, down 78.4% from the prior-year quarter.

Decent Segment Performance

Institutional Securities: Pre-tax income was $3 billion, up 50% from the prior-year quarter. Net revenues were $7.5 billion, up 22.3%. The upside was mainly driven by an increase in investment banking revenues, partly offset by lower fixed income trading revenues.

Wealth Management: The segment includes results of E*Trade Financial. Pre-tax income totaled $1.5 billion, up 36.6% year over year. Net revenues were $5.9 billion, increasing 27.5%, driven by higher net interest income, asset management revenues and other revenues.

Total client assets as of Sep 30, 2021, were $4.6 trillion, up 62.3% year over year.

Investment Management: The segment includes the results of Eaton Vance. Pre-tax income was $370 million, rising 17.5 % from the year-ago quarter’s level. Net revenues were $1.5 billion, surging 37.6%. The upswing was driven by higher asset management and related fees.

As of Sep 30, 2021, total assets under management or supervision were $1.5 trillion, up significantly from $715 billion as of Sep 30, 2020.

Strong Capital Position

As of Sep 30, 2021, book value per share was $54.56, up from $50.67 recorded in the corresponding period of 2020. Tangible book value per share was $40.47, down from $44.81 as of Sep 30, 2020.

Morgan Stanley’s Tier 1 capital ratio (advanced approach) was 18.9% compared with 19.0% in the year-ago quarter. Common equity Tier 1 capital ratio was 17.1%, up from 16.9%.

Capital Deployment Update

In the reported quarter, Morgan Stanley repurchased shares worth $3.6 billion.

Our Take

Morgan Stanley’s efforts to diversify operations with more focus on those, which are less dependent on the capital markets, are commendable. The acquisitions of Eaton Vance and the buyout of E*Trade Financial are steps in this direction. However, elevated expenses due to the company’s constant investments in franchise are likely to hurt the bottom line.

Morgan Stanley Price, Consensus and EPS Surprise

 

Morgan Stanley Price, Consensus and EPS Surprise

Morgan Stanley price-consensus-eps-surprise-chart | 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.

Performance & Upcoming Release Dates of Large Banks

Robust advisory business, reserve release and a modest rise in demand for loans drove JPMorgan’s (JPM - Free Report) third-quarter 2021 earnings of $3.74 per share. The bottom line also outpaced the Zacks Consensus Estimate of $3.00.

First Republic Bank delivered an earnings surprise of 4.4% in third-quarter 2021 on solid top-line strength. Earnings per share of $1.91 surpassed the Zacks Consensus Estimate of $1.83. The bottom line improved 18.6% from the year-ago quarter’s figure.

Goldman Sachs (GS - Free Report) will come up with quarterly numbers tomorrow.


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