Significant improvement in trading revenues drove Morgan Stanley’s (MS - Analyst Report) third-quarter 2016 earnings from continuing operations of 80 cents per share, which easily surpassed the Zacks Consensus Estimate of 64 cents. Further, this shows a 138% jump from the prior-year quarter, which excludes DVA.
Shares of Morgan Stanley gained more than 1% in pre-market trading perhaps driven by a massive turn-around in fixed-income, currency and commodities (“FICC”) trading income. Notably, the stock’s price performance after the full day’s trading will give a better indication about the investors’ sentiments.
A drastic rebound in FICC trading revenues, higher net interest income and a marginal increase in equity trading revenues were primarily responsible for significant improvement in earnings. Further, the company’s capital ratios remained strong.
However, weakness in underwriting income and advisory fees were on the downside. Further, a rise in compensation costs led to increase in operating expenses.
Net income applicable to Morgan Stanley was $1.60 billion, up 57% year over year.
Rebound in Trading Supports Revenue, Costs Up
Net revenue amounted to $8.9 billion, an increase of 15% from the prior-year quarter. Also, it surpassed the Zacks Consensus Estimate of $8.2 billion.
Net interest income was $1 billion, up 32% from the year-ago quarter. This was largely driven by a 20% rise in interest income. Meanwhile, total non-interest revenue of $7.9 billion grew 13% year over year, primarily supported by improvement in trading and investments.
Total non-interest expenses were $6.5 billion, up 4% year over year. The rise is due to a 19% improvement in compensation and benefits.
Quarterly Segmental Performance
Institutional Securities (IS): Pre-tax income from continuing operations was $1.38 billion, up 101% year over year. Net revenue was $4.6 billion, a rise of 17% from the year-ago quarter. The improvement was primarily attributable to a 61% rise in FICC income, partly offset by lower advisory revenues and underwriting fees.
Wealth Management (WM): Pre-tax income from continuing operations totaled $901 million, an increase of 9% on a year-over-year basis. Net revenue was $3.9 billion, up 7% year over year, driven by higher transactional revenues and net interest income. These were, nevertheless, partially offset by a fall in asset management fee revenues.
Investment Management (IM): Pre-tax income from continuing operations was $97 million, compared with pre-tax loss of $38 million from the year-ago quarter. Net revenue was $552 million, a surge of 101% year over year. The rise reflected the reversal of previously accrued carried interest associated with the Asia private equity business.
As of Sep 30, 2016, total assets under management or supervision were $417 billion, up 3% on a year-over-year basis.
Strong Capital Position
As of Sep 30, 2016, book value per share was $37.11, up from $34.97 as of Sep 30, 2015. Tangible book value per share was $32.13, up from $29.99 as of Sep 30, 2015.
Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 18.9%, up from 15.6% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 16.9%, up from 14.0% in the prior-year quarter.
During the reported quarter, Morgan Stanley bought back around 41 million shares for nearly $1.25 billion. This was part of the share buyback program announced by the company, under which shares worth up to $3.5 billion can be repurchased through second-quarter 2017.
Rebound in FICC trading was the highlight of the recently concluded quarter, boosting Morgan Stanley’s results. Further, interest income continued to show improvement. However, a slump in investment banking remains a weakness.
Nonetheless, Morgan Stanley’s initiatives to offload its non-core assets in order to lower balance-sheet risks and shift focus toward less capital-incentive IM and WM segments are commendable.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Among other banking giants, JPMorgan Chase & Co. (JPM - Analyst Report) , Bank of America Corp. (BAC - Analyst Report) and Citigroup Inc. (C - Analyst Report) have already come up with their third-quarter results. The performances of these companies have been encouraging.
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