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Weak Loan Growth, IB to Hurt Morgan Stanley's (MS) Q4 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 not expected to have been significantly impressive in the fourth quarter of 2023 due to subdued market volatility. Thus, the company’s trading numbers are expected to have provided little support to its quarterly results, slated to be announced before the opening bell on Jan 16.
While the risks of a near-term recession faded in the fourth quarter, ambiguity among investors remained on lingering concerns related to high inflation and other geopolitical issues. Due to this, not much volatility was witnessed in the markets. Moreover, client activity was relatively subdued.
Nevertheless, as the Federal Reserve pointed out that it would no longer raise interest rates in 2023 and gave indications of rate cuts in 2024, the overall performance of the equity markets improved substantially toward the end of 2023 on the grounds of increased liquidity.
Thus, despite subdued volatility and trading volumes, Morgan Stanley’s trading revenues are expected to have witnessed decent improvement, supported by strong equity market performance.
The Zacks Consensus Estimate for the company’s equity trading revenues is pegged at $2.21 billion, suggesting a rise of 1.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.45 billion indicates a year-over-year increase of 2.3%.
Our estimates for equity trading revenues and fixed-income trading revenues are $2.15 billion and $1.33 billion, respectively.
Other Key Factors at Play
Investment Banking (IB) Income: While green shoots were visible in the investment banking space in the fourth quarter, overall M&A activities remained subdued on a year-over-year basis. Headwinds like lingering geopolitical tensions, inflation concerns, higher interest rates and China’s cool-down weighed on deal-making, particularly larger offerings in developed nations.
Thus, total deal volume and value numbers remained weak in the 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 $469 million, suggesting a year-over-year decline of 34%. Our estimate for the same is pinned at $537.7 million, indicating a 24.4% dip.
Because of the above-mentioned macro concerns, the IPO markets did not witness much activity in the quarter. While follow-up equity issuances were decent on the back of robust equity market performance toward the end of the year, bond issuance volumes were soft.
Hence, Morgan Stanley’s underwriting fees are not expected to have improved much in the quarter on a year-over-year basis.
The consensus estimate for fixed-income underwriting fees is pegged at $293 million, suggesting a decline of 6.7% from the year-ago reported figure. The Zacks Consensus Estimate for equity underwriting fees of $256 million indicates an increase of 12.8%. The consensus estimate for total underwriting fees of $549 million implies a rise of 1.5% from the prior-year quarter.
Our estimate for fixed-income underwriting fees is $285.2 million, while that for equity underwriting fees is $212.6 million.
Because of the expected decline in advisory revenues, growth in total IB income is likely to have been muted. The Zacks Consensus Estimate for IB income of $1.03 billion indicates a year-over-year decline of 17.8%. Our estimate for IB income is pegged at $1.04 billion.
Net Interest Income (NII): The overall lending scenario was weak in the to-be-reported quarter. Per the Fed’s latest data, while the demand for commercial and industrial loans was decent in October, the demand declined in November. The demand for real estate loans and consumer loans was also moderate in the two months.
While interest rates remained high in the fourth quarter, the Fed paused its rate hike cycle, with indications of rate cuts in 2024. Thus, despite higher rates, Morgan Stanley’s NII is expected to have been negatively impacted by muted loan growth and rising deposit and funding costs.
The consensus estimate for NII is pegged at $1.89 billion, suggesting a decline of 18.3% on a year-over-year basis. Our estimate for NII is $1.92 billion, implying a decline of 17.2%.
Management stated that it expects NII to trend lower in the fourth quarter on a sequential basis.
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 December-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.
We expect fourth-quarter total non-interest expenses of $9.71 billion.
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 -2.41%.
Zacks Rank: The company currently carries a Zacks Rank #3.
The Zacks Consensus Estimate for the company’s fourth-quarter earnings has been unchanged at $1.15 over the past seven days. The estimate suggests a 12.2% decline from the year-ago reported number. Our estimate for earnings is pegged at $1.17 per share.
The consensus estimate for sales is pegged at $12.83 billion, which indicates a year-over-year rise of almost 1%. Our estimate for total revenues is pegged at $12.77 billion.
Stocks to Consider
Here are a couple of 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 U.S. Bancorp (USB - Free Report) is +1.75% and it carries a Zacks Rank #3 at present. The company is slated to report fourth-quarter and full-year 2023 results on Jan 17.
Over the past seven days, the Zacks Consensus Estimate for USB’s quarterly earnings has remained unchanged at 99 cents.
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Weak Loan Growth, IB to Hurt Morgan Stanley's (MS) Q4 Earnings
The performance of Morgan Stanley’s (MS - Free Report) trading business (constituting a significant portion of its top line) is not expected to have been significantly impressive in the fourth quarter of 2023 due to subdued market volatility. Thus, the company’s trading numbers are expected to have provided little support to its quarterly results, slated to be announced before the opening bell on Jan 16.
While the risks of a near-term recession faded in the fourth quarter, ambiguity among investors remained on lingering concerns related to high inflation and other geopolitical issues. Due to this, not much volatility was witnessed in the markets. Moreover, client activity was relatively subdued.
Nevertheless, as the Federal Reserve pointed out that it would no longer raise interest rates in 2023 and gave indications of rate cuts in 2024, the overall performance of the equity markets improved substantially toward the end of 2023 on the grounds of increased liquidity.
Thus, despite subdued volatility and trading volumes, Morgan Stanley’s trading revenues are expected to have witnessed decent improvement, supported by strong equity market performance.
The Zacks Consensus Estimate for the company’s equity trading revenues is pegged at $2.21 billion, suggesting a rise of 1.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $1.45 billion indicates a year-over-year increase of 2.3%.
Our estimates for equity trading revenues and fixed-income trading revenues are $2.15 billion and $1.33 billion, respectively.
Other Key Factors at Play
Investment Banking (IB) Income: While green shoots were visible in the investment banking space in the fourth quarter, overall M&A activities remained subdued on a year-over-year basis. Headwinds like lingering geopolitical tensions, inflation concerns, higher interest rates and China’s cool-down weighed on deal-making, particularly larger offerings in developed nations.
Thus, total deal volume and value numbers remained weak in the 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 $469 million, suggesting a year-over-year decline of 34%. Our estimate for the same is pinned at $537.7 million, indicating a 24.4% dip.
Because of the above-mentioned macro concerns, the IPO markets did not witness much activity in the quarter. While follow-up equity issuances were decent on the back of robust equity market performance toward the end of the year, bond issuance volumes were soft.
Hence, Morgan Stanley’s underwriting fees are not expected to have improved much in the quarter on a year-over-year basis.
The consensus estimate for fixed-income underwriting fees is pegged at $293 million, suggesting a decline of 6.7% from the year-ago reported figure. The Zacks Consensus Estimate for equity underwriting fees of $256 million indicates an increase of 12.8%. The consensus estimate for total underwriting fees of $549 million implies a rise of 1.5% from the prior-year quarter.
Our estimate for fixed-income underwriting fees is $285.2 million, while that for equity underwriting fees is $212.6 million.
Because of the expected decline in advisory revenues, growth in total IB income is likely to have been muted. The Zacks Consensus Estimate for IB income of $1.03 billion indicates a year-over-year decline of 17.8%. Our estimate for IB income is pegged at $1.04 billion.
Net Interest Income (NII): The overall lending scenario was weak in the to-be-reported quarter. Per the Fed’s latest data, while the demand for commercial and industrial loans was decent in October, the demand declined in November. The demand for real estate loans and consumer loans was also moderate in the two months.
While interest rates remained high in the fourth quarter, the Fed paused its rate hike cycle, with indications of rate cuts in 2024. Thus, despite higher rates, Morgan Stanley’s NII is expected to have been negatively impacted by muted loan growth and rising deposit and funding costs.
The consensus estimate for NII is pegged at $1.89 billion, suggesting a decline of 18.3% on a year-over-year basis. Our estimate for NII is $1.92 billion, implying a decline of 17.2%.
Management stated that it expects NII to trend lower in the fourth quarter on a sequential basis.
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 December-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.
We expect fourth-quarter total non-interest expenses of $9.71 billion.
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 -2.41%.
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 fourth-quarter earnings has been unchanged at $1.15 over the past seven days. The estimate suggests a 12.2% decline from the year-ago reported number. Our estimate for earnings is pegged at $1.17 per share.
The consensus estimate for sales is pegged at $12.83 billion, which indicates a year-over-year rise of almost 1%. Our estimate for total revenues is pegged at $12.77 billion.
Stocks to Consider
Here are a couple of 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 U.S. Bancorp (USB - Free Report) is +1.75% and it carries a Zacks Rank #3 at present. The company is slated to report fourth-quarter and full-year 2023 results on Jan 17.
Over the past seven days, the Zacks Consensus Estimate for USB’s quarterly earnings has remained unchanged at 99 cents.
M&T Bank (MTB - Free Report) is scheduled to release fourth-quarter and full-year 2023 earnings on Jan 18. The company, which carries a Zacks Rank #3 at present, has an Earnings ESP of +0.83%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MTB’s quarterly earnings estimates have moved marginally upward over the past week to $3.74.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.