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Subdued Trading to Hurt Morgan Stanley's (MS) Q4 Earnings

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Morgan Stanley’s (MS - Free Report) fourth-quarter 2021 results, slated to be reported on Jan 19, are not expected to reflect a solid trading performance. Unlike 2020 and the first few months of 2021, wherein significant market volatility and client activity supported trading revenues, market normalization dampened the overall trading business in the fourth quarter. Thus, Morgan Stanley’s trading revenues (a major revenue component) are less likely to have offered major support to its overall performance.

Like the past quarters, major indexes – the S&P 500, Dow Jones and Nasdaq – witnessed an upswing during the fourth quarter, with all three touching new highs. Further, concerns over accelerating coronavirus infections across the globe, rising inflation, fading fiscal stimulus and the Federal Reserve’s hawkish monetary stance weighed on investor sentiments. Though these factors resulted in a heightened level of equity market volatility during the fourth quarter, it was still low compared with the prior-year period. Bond trading remained decent in the October-December quarter.

Thus, Morgan Stanley’s equity and fixed-income markets revenues are unlikely to have improved much during the quarter. The Zacks Consensus Estimate for equity trading revenues is pegged at $2.43 billion, which suggests a decline of 2.6% from the previous-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.44 billion indicates a decrease of 13.5% year over year.

Over, the Zacks Consensus Estimate for trading revenues of $3.89 billion indicates a 7.9% fall on a year-over-year basis.

Other Factors to Influence Q4 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, there was a steady rise in follow-up equity issuances. These are likely to have supported Morgan Stanley’s equity underwriting revenues.

Growth in the company’s debt underwriting fees, which account for more than 50% of its total underwriting fees, is expected to have been decent in the to-be-reported quarter as the companies continued to take advantage of low-interest-rate environment.

The consensus estimate for fixed-income underwriting fees is pegged at $534 million, suggesting a rise of 12.4% from the prior-year quarter’s reported figure. The Zacks Consensus Estimate for equity underwriting fee of $594 million indicates a fall of 13.3%. Thus, the consensus estimate for total underwriting fees of $1.4 billion implies a year-over-year plunge of 39.1%.

Advisory income: Like the past several quarters, deal-making continued at a robust pace in fourth-quarter 2021, with both deal volume and value witnessing strong growth. This was primarily driven by the resumption of normal business activities, excess liquidity levels, companies’ appetite for strengthening scale and market share and solid economic recovery.

Also, Morgan Stanley’s position as one of the leading players in the space is likely to have provided leverage. Hence, the company’s advisory fees are likely to have been positively impacted.

The consensus estimate for advisory fees is pegged at $1.1 billion, suggesting a jump of 33.3% on a year-over-year basis.

Net interest income (NII): The overall loan demand witnessed a decent rise in the fourth quarter, with demand for real estate and consumer loans showing marked improvement. Thus, decent loan demand and solid economic growth during the quarter are expected to have extended some support to Morgan Stanley’s NII and net interest margin. However, the prevailing low interest-rate environment remained a headwind.

Expenses: Cost reduction, which has long been the main strategy of Morgan Stanley to remain profitable, is unlikely to have been a major support in the December quarter. As the company continues to invest in franchise, overall costs are anticipated to have flared up.

What Our Quantitative Model Predicts

Our proven model cannot conclusively predict an earnings beat for Morgan Stanley this time around. 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 #2 (Buy).

Morgan Stanley Price and EPS Surprise

Morgan Stanley Price and EPS Surprise

Morgan Stanley price-eps-surprise | Morgan Stanley Quote

The Zacks Consensus Estimate for fourth-quarter earnings has moved 8.1% north to $2.00 over the past 30 days. The estimate suggests a 4.2% rise from the year-ago reported number. The consensus estimate for sales is pegged at $14.77 billion, which indicates a year-over-year rise of 8.3%.

Banks Worth a Look

Here are few bank 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 PNC Financial Services Group, Inc. (PNC - Free Report) is scheduled to release fourth-quarter and full-year 2021 earnings on Jan 18. PNC, which carries a Zacks Rank #3 at present, has an Earnings ESP of +2.29%.

PNC Financial’s quarterly earnings estimates of $3.61 have decreased marginally over the past month.

Commerce Bancshares (CBSH - Free Report) is slated to announce fourth-quarter and full-year 2021 results on Jan 19. CBSH currently carries a Zacks Rank #3 and has an Earnings ESP of +0.71%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CBSH’s earnings estimates for the to-be-reported quarter of 94 cents have moved 3.3% north over the 30 days.

BankUnited (BKU - Free Report) is scheduled to release earnings on Jan 21. BKU, which carries a Zacks Rank #2 at present, has an Earnings ESP of +42.98%.

The Zacks Consensus Estimate for BankUnited’s fourth-quarter earnings of $1.14 has been unchanged over the past month.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.