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Weak Trading, IB to Hurt Morgan Stanley's (MS) Q2 Earnings
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The performance of Morgan Stanley’s (MS - Free Report) trading business (constituting a significant portion of its top line) is expected to have been subdued in the second quarter of 2023. Hence, the company’s quarterly numbers, slated to be announced on Jul 18 before the opening bell, are expected to be hit by weak trading performance.
Unlike the past few quarters when huge market volatility and client activity drove trading revenues, capital markets were subdued in the second quarter of 2023. The Congressional debate over the debt ceiling, risks of an economic downturn/recession, the Federal Reserve’s hawkish monetary policy stance to stem out “sticky” inflation and geopolitical concerns led to ambiguity among investors.
These factors, thus, resulted in lower volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. So, Morgan Stanley is likely to have witnessed a muted trading performance in the to-be-reported quarter. Also, tougher comps from the prior year are expected to have weighed on performance.
Further, Morgan Stanley’s co-president Andy Saperstein, in an investor conference, noted that because of a more challenging economic environment, the company’s sales and trading “results will be notably down year over year versus a strong second quarter last year.”
The Zacks Consensus Estimate for equity trading revenues is pegged at $2.61 billion, suggesting a fall of 11.9% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $2.07 billion indicates a year-over-year decrease of 17.2%.
Our estimates for equity trading revenues and fixed-income trading revenues are $2.5 billion and $1.9 billion, respectively.
Other Key Factors at Play
Investment Banking (IB) Income: Global deal-making continued to slump on a year-over-year basis in the second quarter, though green shoots were visible toward the end of the quarter. A host of factors like geopolitical tensions, stand-off over the U.S. debt ceiling, inflation, rising interest rates and fears of a global recession acted as major headwinds.
Thus, the deal volume and total value numbers crashed in the second quarter. While Morgan Stanley’s position as one of the leading players in the space is likely to have provided some leverage, overall growth in advisory fees is not expected to have been that impressive in the quarter.
The consensus estimate for advisory fees is pegged at $563.3 million, suggesting a decline of 5.9% year over year. Our estimate for the same is $552.4 million.
For similar reasons, IPOs and follow-up equity issuances were lower in the to-be-reported quarter. Bond issuance volume was also muted as investors turned pessimistic. Hence, Morgan Stanley’s underwriting fees are expected to have been hurt in the quarter under review. Yet, compared with last year’s performance, underwriting revenues are not likely to have declined much.
The consensus estimate for fixed-income underwriting fees is pegged at $340.5 million, suggesting a rise of 4.4%. The Zacks Consensus Estimate for equity underwriting fees of $181.2 million indicates an increase of 22.4%. The consensus estimate for total underwriting fees of $521.7 million implies a rise of 10.1%.
Our estimate for fixed-income underwriting fees is $314.7 million, while that for equity underwriting fees is $140.2 million.
Overall, the Zacks Consensus Estimate for IB income of $1.1 billion indicates a rise of 2.6%. Our estimate for IB income is $1 billion.
Net Interest Income (NII): Lending activities slowed down in the to-be-reported quarter. Per the Fed’s latest data, the demand for commercial and industrial loans was soft in April and May, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
Continuing with its efforts to curb inflation, the Fed raised the interest rates by another 25 basis points in May before pausing the hike in the June FOMC meeting. The policy rate is now at a 15-year high of 5-5.25%. While this is likely to have had a favorable impact on Morgan Stanley’s NIM and NII, the inversion of the yield curve in the June-ended quarter and higher deposit costs are expected to have weighed on it to some extent.
The consensus estimate for NII is pegged at $2.27 billion, suggesting an increase of 2.5% on a year-over-year basis. Our estimate for NII is $2.32 billion.
Expenses: Cost reduction, which has long been the main strategy of Morgan Stanley to remain profitable, is unlikely to have provided major support in the June-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.
We expect total non-interest expenses of $9.7 billion to be relatively stable year over year.
What Our Quantitative Model Predicts
According to our proven model, the chances of Morgan Stanley beating the Zacks Consensus Estimate for earnings this time are low. This is because it doesn’t 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 -9.09%.
Zacks Rank: The company currently carries a Zacks Rank #3.
The Zacks Consensus Estimate for the company’s second-quarter earnings has moved 3.6% lower to $1.35 over the past seven days. The estimate suggests a 6.3% decline from the year-ago reported number. Our estimate for earnings is $1.55 per share.
The consensus estimate for sales is pegged at $12.84 billion, which indicates a year-over-year fall of 2.2%. Our estimate for total revenues is $13.23 billion.
Banks to Consider
Here are a couple of 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:
The Earnings ESP for Wells Fargo (WFC - Free Report) is +0.16% and it carries a Zacks Rank #3 at present. The company is slated to report second-quarter 2023 results on Jul 14.
Over the past seven days, the Zacks Consensus Estimate for WFC’s quarterly earnings has remained unchanged.
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Weak Trading, IB to Hurt Morgan Stanley's (MS) Q2 Earnings
The performance of Morgan Stanley’s (MS - Free Report) trading business (constituting a significant portion of its top line) is expected to have been subdued in the second quarter of 2023. Hence, the company’s quarterly numbers, slated to be announced on Jul 18 before the opening bell, are expected to be hit by weak trading performance.
Unlike the past few quarters when huge market volatility and client activity drove trading revenues, capital markets were subdued in the second quarter of 2023. The Congressional debate over the debt ceiling, risks of an economic downturn/recession, the Federal Reserve’s hawkish monetary policy stance to stem out “sticky” inflation and geopolitical concerns led to ambiguity among investors.
These factors, thus, resulted in lower volatility in equity markets and other asset classes, including commodities, bonds and foreign exchange. So, Morgan Stanley is likely to have witnessed a muted trading performance in the to-be-reported quarter. Also, tougher comps from the prior year are expected to have weighed on performance.
Further, Morgan Stanley’s co-president Andy Saperstein, in an investor conference, noted that because of a more challenging economic environment, the company’s sales and trading “results will be notably down year over year versus a strong second quarter last year.”
The Zacks Consensus Estimate for equity trading revenues is pegged at $2.61 billion, suggesting a fall of 11.9% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $2.07 billion indicates a year-over-year decrease of 17.2%.
Our estimates for equity trading revenues and fixed-income trading revenues are $2.5 billion and $1.9 billion, respectively.
Other Key Factors at Play
Investment Banking (IB) Income: Global deal-making continued to slump on a year-over-year basis in the second quarter, though green shoots were visible toward the end of the quarter. A host of factors like geopolitical tensions, stand-off over the U.S. debt ceiling, inflation, rising interest rates and fears of a global recession acted as major headwinds.
Thus, the deal volume and total value numbers crashed in the second quarter. While Morgan Stanley’s position as one of the leading players in the space is likely to have provided some leverage, overall growth in advisory fees is not expected to have been that impressive in the quarter.
The consensus estimate for advisory fees is pegged at $563.3 million, suggesting a decline of 5.9% year over year. Our estimate for the same is $552.4 million.
For similar reasons, IPOs and follow-up equity issuances were lower in the to-be-reported quarter. Bond issuance volume was also muted as investors turned pessimistic. Hence, Morgan Stanley’s underwriting fees are expected to have been hurt in the quarter under review. Yet, compared with last year’s performance, underwriting revenues are not likely to have declined much.
The consensus estimate for fixed-income underwriting fees is pegged at $340.5 million, suggesting a rise of 4.4%. The Zacks Consensus Estimate for equity underwriting fees of $181.2 million indicates an increase of 22.4%. The consensus estimate for total underwriting fees of $521.7 million implies a rise of 10.1%.
Our estimate for fixed-income underwriting fees is $314.7 million, while that for equity underwriting fees is $140.2 million.
Overall, the Zacks Consensus Estimate for IB income of $1.1 billion indicates a rise of 2.6%. Our estimate for IB income is $1 billion.
Net Interest Income (NII): Lending activities slowed down in the to-be-reported quarter. Per the Fed’s latest data, the demand for commercial and industrial loans was soft in April and May, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
Continuing with its efforts to curb inflation, the Fed raised the interest rates by another 25 basis points in May before pausing the hike in the June FOMC meeting. The policy rate is now at a 15-year high of 5-5.25%. While this is likely to have had a favorable impact on Morgan Stanley’s NIM and NII, the inversion of the yield curve in the June-ended quarter and higher deposit costs are expected to have weighed on it to some extent.
The consensus estimate for NII is pegged at $2.27 billion, suggesting an increase of 2.5% on a year-over-year basis. Our estimate for NII is $2.32 billion.
Expenses: Cost reduction, which has long been the main strategy of Morgan Stanley to remain profitable, is unlikely to have provided major support in the June-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.
We expect total non-interest expenses of $9.7 billion to be relatively stable year over year.
What Our Quantitative Model Predicts
According to our proven model, the chances of Morgan Stanley beating the Zacks Consensus Estimate for earnings this time are low. This is because it doesn’t 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 -9.09%.
Zacks Rank: The company currently carries a Zacks Rank #3.
Morgan Stanley Price and EPS Surprise
Morgan Stanley price-eps-surprise | Morgan Stanley Quote
The Zacks Consensus Estimate for the company’s second-quarter earnings has moved 3.6% lower to $1.35 over the past seven days. The estimate suggests a 6.3% decline from the year-ago reported number. Our estimate for earnings is $1.55 per share.
The consensus estimate for sales is pegged at $12.84 billion, which indicates a year-over-year fall of 2.2%. Our estimate for total revenues is $13.23 billion.
Banks to Consider
Here are a couple of 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:
The Earnings ESP for Wells Fargo (WFC - Free Report) is +0.16% and it carries a Zacks Rank #3 at present. The company is slated to report second-quarter 2023 results on Jul 14.
Over the past seven days, the Zacks Consensus Estimate for WFC’s quarterly earnings has remained unchanged.
U.S. Bancorp (USB - Free Report) is scheduled to release second-quarter 2023 earnings on Jul 19. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.39%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
USB’s quarterly earnings estimates have moved 1.7% lower over the past week.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.