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Will Trading Slowdown Hurt Morgan Stanley (MS) Q3 Earnings?

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Morgan Stanley’s (MS - Free Report) third-quarter results, scheduled for Oct 17, are expected to show a decline in trading income — one of the major revenue components. While this could majorly affect its earnings, an expected improvement in revenues from other segments should offset the negative impact on earnings.    

Similar to the prior quarter, slump in fixed-income trading revenues is expected to be the main reason for the decline in trading revenues. The Zacks Consensus Estimate for fixed income trading revenues of $1.18 billion reflect a decline of 5.1% sequentially and 20.5% from the year-ago quarter. On the other hand, the Zacks Consensus Estimate for equity trading revenues of $1.88 billion indicates a decrease of 12.7% from the prior quarter. However, equity trading revenues are expected to be flat on a year-over-year basis.

The decline in trading revenues is largely attributable to higher-than-usual volatility (due to the Brexit aftermath and the impending U.S. presidential election) in the year-ago quarter. But trading activities remained sluggish in the to-be-reported quarter as well.

Absence of any concrete development on the proposed financial reforms by the Trump administration and an unchanged monetary policy of the Fed were the primary reasons for reduced volatility for the major part of the quarter.

Overall, Q3 trading revenue is expected to be $2.86 billion, down 10.3% from the last quarter and 9.8% from the prior-year quarter.

Here are the other factors that might influence Morgan Stanley’s Q3 results:

Underwriting fees to rise: Though equity underwriting volumes in the third quarter were low owing to seasonality, this is not likely to have any significant impact on Morgan Stanley’s equity underwriting market share, given its strong global presence. The Zacks Consensus Estimate for equity underwriting fees of $297 million reflects a jump of 25.8% from the prior-year quarter.

Additionally, as the interest rate hike is expected to continue, many U.S. companies have been raising fresh debt capital over the recent quarters to avoid higher interest rates later. As debt origination fees account for more than half of Morgan Stanley’s total underwriting fees, this has been leading to strong gains for Morgan Stanley. The Zacks Consensus Estimate for debt underwriting fees of $395 million reflects year-over-year growth of 8.5%.

All in all, total underwriting fees is projected to witness a 15.3% year-over-year rise as the Zacks Consensus Estimate for the to-be-reported quarter is $692 million.

Stable advisory fees: With the overall improvement in global M&A scenario during the third quarter, Morgan Stanley should be able to generate decent advisory fees. The Zacks Consensus Estimate for advisory fees is $502 million, relatively stable year over year.

Net interest income (NII) to increase marginally: Improvement in demand for loans — particularly, in the areas of commercial and industrial, and consumer — is expected to support NII. Further, a rise in interest rates will likely lead to an increase in interest income.

Expense control to support bottom line: Morgan Stanley’s cost savings plan — Project Streamline — is likely to result in lower expenses during the quarter. Also, as much improvement in revenues is not likely, chances of a big increase in compensation expenses is low.

Here is what our quantitative model predicts:

Morgan Stanley does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing 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.  

Zacks ESP: The Earnings ESP for Morgan Stanley is 0.00%.

Zacks Rank: Morgan Stanley carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Nonetheless, the Zacks Consensus Estimate for earnings of 81 cents reflects a 1.3% improvement on a year-over-year basis. The Zacks Consensus Estimate for sales of $9 billion indicate a marginal growth from the prior-year quarter.

Morgan Stanley Price and EPS Surprise

Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote

Stocks Worth a Look

Here are a few bank stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated (CMA - Free Report) is scheduled to report results on Oct 17. It has an Earnings ESP of +0.23% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for Synovus Financial Corp. (SNV - Free Report) is +0.52% and it carries a Zacks Rank #2 (Buy). The company is scheduled to release results on Oct 17.

M&T Bank Corp.’s (MTB - Free Report) Earnings ESP is +0.33% and it carries a Zacks Rank #3. The company is scheduled to release third-quarter results on Oct 18.

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