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Weak Trading Performance to Hurt Morgan Stanley (MS) Q3 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 third quarter of 2023. The company’s quarterly numbers, slated to be announced on Oct 18 before the opening bell, are thus expected to have been hit by weak trading performance.
While the risk of a near-term recession has faded, concerns like the economic slowdown, the central bank’s hawkish monetary policy and other geopolitical issues remain, which led to ambiguity among investors in the third quarter. Due to these factors, market volatility and client activity were subdued in the quarter.
Moreover, since the third quarter is a seasonally weak one for capital markets, Morgan Stanley is expected to have witnessed a muted trading performance.
The Zacks Consensus Estimate for the company’s equity trading revenues is pegged at $2.35 billion, suggesting a fall of 4.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.84 billion indicates a year-over-year decrease of 15.5%.
Our estimates for equity trading revenues and fixed-income trading revenues are $2.34 billion and $1.67 billion, respectively.
Other Key Factors at Play
Investment Banking (IB) Income: Global deal-making witnessed a slight rebound in the third quarter, but M&A activities remained subdued on a year-over-year basis. Headwinds like geopolitical tensions, government shutdown, inflation, rising interest rates and fears of a global economic slowdown continued to weigh on deal-making.
Thus, the deal volume and total value numbers were weak in the third 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 $512 million, suggesting a year-over-year decline of 26.1%. Our estimate for the same is pinned at $624.5 million, indicating a 9.9% dip.
Then, the IPO market witnessed considerable activity in the third quarter, with 26 IPOs jointly raising $7.7 billion. The amount is almost equal to the total proceeds raised in 2022. However, the overall performance was still subdued and nowhere near normal.
However, while follow-up equity issuances were soft in the to-be-reported quarter, bond issuance volumes improved from the prior-year quarter.
Hence, Morgan Stanley’s underwriting fees are not expected to have declined much in the quarter on a year-over-year basis, driven by a decent fixed-income underwriting performance.
The consensus estimate for fixed-income underwriting fees is pegged at $386 million, suggesting a rise of 5.5% from the year-ago reported figure. The Zacks Consensus Estimate for equity underwriting fees of $263 million indicates an increase of 20.6%. The consensus estimate for total underwriting fees of $649 million implies a rise of 11.1% from the prior-year quarter.
Our estimate for fixed-income underwriting fees is $376.2 million, while that for equity underwriting fees is $222.3 million.
However, because of an expected decline in advisory revenues, growth in total IB income is likely to have been muted. The Zacks Consensus Estimate for IB income of $1.24 billion indicates a year-over-year decline of 2.8%. Our estimate for IB income is pegged at $1.22 billion.
Net Interest Income (NII): The overall lending scenario was weak in the to-be-reported quarter. Per the Fed’s latest data, the demand for commercial and industrial loans was weak in July and August, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
The Federal Reserve continued to tighten its monetary policy, increasing interest rates by another 25 basis points in the third quarter. The policy rate now stands at a 22-year high of 5.25-5.5%. 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 September-ended quarter, a slowdown in deposit growth and rising funding costs are expected to have weighed on it to an extent.
The consensus estimate for NII is pegged at $2.06 billion, suggesting a decline of 18% on a year-over-year basis. Our estimate for NII is $1.98 billion, implying a decline of 21.3%.
Management stated that it does not expect expansion in quarterly NII going forward.
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 September-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.
Moreover, additional integration-related costs related to E*Trade and Eaton Vance are expected to have resulted in an increase in the overall cost base.
We expect total non-interest expenses of $9.99 billion, suggesting a year-over-year rise of 4.5%.
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 -2.89%.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
The Zacks Consensus Estimate for the company’s third-quarter earnings has moved 3.6% lower to $1.32 over the past seven days. The estimate suggests a 13.7% decline from the year-ago reported number. Our estimate for earnings is $1.35 per share.
The consensus estimate for sales is pegged at $13.3 billion, which indicates a year-over-year rise of 2%. Our estimate for total revenues is also pegged at $13.3 billion.
A couple of finance stocks that you may want to consider, as these have the right combination of elements to post an earnings beat in the upcoming releases per our model, are Wells Fargo (WFC - Free Report) and PNC Financial (PNC - Free Report) .
PNC Financial is also scheduled to release third-quarter 2023 earnings on Oct 13. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.60%.
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Weak Trading Performance to Hurt Morgan Stanley (MS) Q3 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 third quarter of 2023. The company’s quarterly numbers, slated to be announced on Oct 18 before the opening bell, are thus expected to have been hit by weak trading performance.
While the risk of a near-term recession has faded, concerns like the economic slowdown, the central bank’s hawkish monetary policy and other geopolitical issues remain, which led to ambiguity among investors in the third quarter. Due to these factors, market volatility and client activity were subdued in the quarter.
Moreover, since the third quarter is a seasonally weak one for capital markets, Morgan Stanley is expected to have witnessed a muted trading performance.
The Zacks Consensus Estimate for the company’s equity trading revenues is pegged at $2.35 billion, suggesting a fall of 4.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.84 billion indicates a year-over-year decrease of 15.5%.
Our estimates for equity trading revenues and fixed-income trading revenues are $2.34 billion and $1.67 billion, respectively.
Other Key Factors at Play
Investment Banking (IB) Income: Global deal-making witnessed a slight rebound in the third quarter, but M&A activities remained subdued on a year-over-year basis. Headwinds like geopolitical tensions, government shutdown, inflation, rising interest rates and fears of a global economic slowdown continued to weigh on deal-making.
Thus, the deal volume and total value numbers were weak in the third 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 $512 million, suggesting a year-over-year decline of 26.1%. Our estimate for the same is pinned at $624.5 million, indicating a 9.9% dip.
Then, the IPO market witnessed considerable activity in the third quarter, with 26 IPOs jointly raising $7.7 billion. The amount is almost equal to the total proceeds raised in 2022. However, the overall performance was still subdued and nowhere near normal.
However, while follow-up equity issuances were soft in the to-be-reported quarter, bond issuance volumes improved from the prior-year quarter.
Hence, Morgan Stanley’s underwriting fees are not expected to have declined much in the quarter on a year-over-year basis, driven by a decent fixed-income underwriting performance.
The consensus estimate for fixed-income underwriting fees is pegged at $386 million, suggesting a rise of 5.5% from the year-ago reported figure. The Zacks Consensus Estimate for equity underwriting fees of $263 million indicates an increase of 20.6%. The consensus estimate for total underwriting fees of $649 million implies a rise of 11.1% from the prior-year quarter.
Our estimate for fixed-income underwriting fees is $376.2 million, while that for equity underwriting fees is $222.3 million.
However, because of an expected decline in advisory revenues, growth in total IB income is likely to have been muted. The Zacks Consensus Estimate for IB income of $1.24 billion indicates a year-over-year decline of 2.8%. Our estimate for IB income is pegged at $1.22 billion.
Net Interest Income (NII): The overall lending scenario was weak in the to-be-reported quarter. Per the Fed’s latest data, the demand for commercial and industrial loans was weak in July and August, while real estate loans and consumer loans (specifically credit cards) witnessed decent demand.
The Federal Reserve continued to tighten its monetary policy, increasing interest rates by another 25 basis points in the third quarter. The policy rate now stands at a 22-year high of 5.25-5.5%. 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 September-ended quarter, a slowdown in deposit growth and rising funding costs are expected to have weighed on it to an extent.
The consensus estimate for NII is pegged at $2.06 billion, suggesting a decline of 18% on a year-over-year basis. Our estimate for NII is $1.98 billion, implying a decline of 21.3%.
Management stated that it does not expect expansion in quarterly NII going forward.
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 September-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.
Moreover, additional integration-related costs related to E*Trade and Eaton Vance are expected to have resulted in an increase in the overall cost base.
We expect total non-interest expenses of $9.99 billion, suggesting a year-over-year rise of 4.5%.
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 -2.89%.
Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).
The Zacks Consensus Estimate for the company’s third-quarter earnings has moved 3.6% lower to $1.32 over the past seven days. The estimate suggests a 13.7% decline from the year-ago reported number. Our estimate for earnings is $1.35 per share.
The consensus estimate for sales is pegged at $13.3 billion, which indicates a year-over-year rise of 2%. Our estimate for total revenues is also pegged at $13.3 billion.
Morgan Stanley Price and EPS Surprise
Morgan Stanley price-eps-surprise | Morgan Stanley Quote
Stocks to Consider
A couple of finance stocks that you may want to consider, as these have the right combination of elements to post an earnings beat in the upcoming releases per our model, are Wells Fargo (WFC - Free Report) and PNC Financial (PNC - Free Report) .
The Earnings ESP for Wells Fargo is +2.11% and it carries a Zacks Rank #3 at present. The company is slated to report third-quarter 2023 results on Oct 13. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PNC Financial is also scheduled to release third-quarter 2023 earnings on Oct 13. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +1.60%.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.