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Will Trading Rebound Aid Morgan Stanley (MS) Q2 Earnings?

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Morgan Stanley (MS - Free Report) is scheduled to announce second-quarter 2016 results on Wednesday, Jul 20, before the opening bell.

Last quarter, Morgan Stanley surpassed the Zacks Consensus Estimate, attributable to an increase in net interest income, higher advisory fees and a fall in operating expenses. However, a slump in fixed-income, currency and commodities (“FICC”) trading income remained an undermining factor.

Notably, Morgan Stanley depicts a decent earnings surprise history, as evident from the chart below:

MORGAN STANLEY Price and EPS Surprise


Factors to Impact Q2 Results

Will Morgan Stanley be able to maintain its earnings streak this quarter driven by improved FICC income? Or will the company succumb to the challenging operating environment?

Let’s dig in to the factors that are likely to influence Morgan Stanley’s Q2 earnings.

Trading Income Likely to Rebound: Driven by impressive trading activities during the quarter, we believe Morgan Stanley will witness a slight rise in trading income. Notably, the client activity was higher for fixed income, while it remained on a weaker side in equities.

Equity Underwriting Fees to be Lower: Per data compiled by Thomson Reuters, equity capital markets activity totaled $159.3 billion during the second quarter, down 43% year over year. Also, the data expects a 44% year-over-year drop in equity underwriting fees for the entire industry.

Given such a dismal backdrop, Morgan Stanley’s equity underwriting fees are likely to fall 46% from the prior-year quarter to $248.8 million, according to the Thomson Reuters data.

Slump in Advisory Fee Revenue: Given the concerns over regulatory and tax risks, increased market volatility and national security, global M&As declined during the second quarter. Further, global economic concerns led to the weakening of IPO market. Notably, per Dealogic, global M&As value was down 20% in the first six months of 2016.

Further, the data compiled by Thomson Reuters shows that M&A advisory fees totaled $5.4 billion during the quarter, a fall of 21% year over year. Morgan Stanley is projected to earn roughly $424 million as advisory fees in the second quarter, indicating a decline of 16% from the prior-year quarter.

Net Interest Income Growth to Continue: Despite a low interest rate environment which continues to hamper interest income growth, a pickup in consumer and commercial loan demand as well as efficient deposit deployment will aid Morgan Stanley’s net interest income.

Efficient Expenses Management: Morgan Stanley has launched a company-wide initiative called Project Streamline. This will enable the company to lower expenses and improve operating efficiency. Hence, the company should benefit from this initiative in the quarter under review.

Earnings Whispers

Now, let’s check what our quantitative model predicts. Our quantitative model does not conclusively predict the earnings beat. Here is what it indicates:

Morgan Stanley doesn’t have the right combination of two main factors – positive Earnings ESP and a Zacks Rank #3 (Hold) or better – for this to happen.

Zacks ESP: The Earnings ESP for Morgan Stanley is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 60 cents.

Zacks Rank: Morgan Stanley carries a Zacks Rank #3. Though this increases predictive power, we need to have positive earnings ESP to be confident of an earning beat.

Notably, Morgan Stanley’s activities during the second quarter were inadequate to win analysts’ confidence, with the Zacks Consensus Estimate remaining stable over the last 7 days.

Stocks Worth a Look

Here are a few finance stocks you may want to consider as they have the right combination of elements to post an earnings beat this quarter, according to our model.

Comerica Incorporated (CMA - Free Report) has an Earnings ESP of +1.47% and carries a Zacks Rank #3. It is scheduled to report results on Jul 19.

Regions Financial Corporation (RF - Free Report) has an Earnings ESP of +5.00% and carries a Zacks Rank #3. It is scheduled to report results on Jul 19.

The Earnings ESP for Hancock Holding Company is +4.55% and it carries a Zacks Rank #3. The company is scheduled to release results on Jul 20.

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