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Morgan Stanley (MS) Q4 Earnings Top on Trading, Underwriting

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Better-than-expected capital markets performance drove Morgan Stanley’s (MS - Free Report) fourth-quarter 2019 adjusted earnings of $1.20 per share, which outpaced the Zacks Consensus Estimate of 98 cents. Also, the figure jumped 64% from the year-ago quarter. Results for the reported quarter include severance costs of $172 million and exclude net discrete tax benefit.

Shares of Morgan Stanley jumped more than 5.5% in pre-market following an unexpected improvement in fixed income trading income. The stock’s price performance after the full day’s trading will give a better picture.

Morgan Stanley recorded a rise in both trading and investment banking revenues. Specifically, fixed income trading revenuessurged 126%, while equity trading income was relatively stable. Overall trading revenues grew 28%.

Now coming to investment banking performance, underwriting income was up 35%. The improvement was driven by a rise in both equity and fixed income underwriting revenues, which were up 31% and 39%, respectively. On the other hand, as expected, advisory fees declined 11%.

Further, higher net interest income, driven by rise in loan balance (up 11%) and lower interest expenses, supported the top line.

However, operating expenses witnessed a rise, mainly due to higher compensation costs (up 38%).

Net income applicable to common shareholders for the quarter was $2.09 billion, increasing 53%.

For 2019, adjusted earnings of $4.98 per share grew 8% year over year and outpaced the Zacks Consensus Estimate of $4.86. Net income applicable to common shareholders was $8.51 billion, up 4%.

Trading, Investment Banking Aid Revenues, Costs Rise

Net revenues for the quarter were $10.86 billion, up 27% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $9.52 billion.

For 2019, net revenues grew 3% to $41.42 billion. It also surpassed the consensus estimate of $40.08 billion.

Net interest income was $1.43 billion, jumping 45% from the year-ago quarter. This was largely due to a 19% fall in interest expenses.

Total non-interest revenues of $9.42 billion jumped 25% year over year.

Total non-interest expenses were $8.12 billion, up 21%.

Impressive Quarterly Segment Performance

Institutional Securities: Pre-tax income from continuing operations was $1.13 billion, increasing 44% year over year. Net revenues were $5.05 billion, up 32%. The rise was mainly driven by higher trading income, investment banking revenues and investment revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.16 billion, up 15%. Net revenues were $4.58 billion, up 11% year over year as rise in transactional revenues and asset management revenues were partially offset by lower net interest income.

Investment Management: Pre-tax income from continuing operations was $447 million, surging substantially from $74 million in the year-ago quarter. Net revenues were $1.36 billion, soaring 98%. The increase was mainly driven by rise in asset management fees and investment revenues.

As of Dec 31, 2019, total assets under management or supervision were $552 billion, up 19% on a year-over-year basis.

Strong Capital Position

As of Dec 31, 2019, book value per share was $45.82, up from $42.20 as of Dec 31, 2018. Tangible book value per share was $40.01, up from $36.99.

Morgan Stanley’s Tier 1 capital ratio was 18.6% compared with 19.2% in the year-ago quarter. Tier 1 common equity ratio was 16.4%, down from 16.9%.

Share Repurchase Update

During the fourth quarter, Morgan Stanley repurchased shares worth $1.5 billion. This was part of the company's 2019 capital plan.

Our Viewpoint

Morgan Stanley’s focus on less capital-incentive operations like wealth management is commendable. However, mounting costs pose a concern.

Morgan Stanley Price, Consensus and EPS Surprise

 

Morgan Stanley Price, Consensus and EPS Surprise

Morgan Stanley price-consensus-eps-surprise-chart | Morgan Stanley Quote

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.

Performance of Other Big Banks

Improved trading and underwriting performance drove Bank of America’s (BAC - Free Report) fourth-quarter 2019 earnings of 74 cents per share, which surpassed the Zacks Consensus Estimate of 68 cents. Also, the figure was up 6% from the prior-year quarter.

Better-than-expected trading performance and rise in mortgage banking fees drove JPMorgan’s (JPM - Free Report) fourth-quarter 2019 earnings of $2.57 per share, which handily outpaced the Zacks Consensus Estimate of $2.32.

Goldman Sachs (GS - Free Report) reported a negative earnings surprise of 9.8% in fourth-quarter 2019. The company posted earnings per share of $4.69, missing the Zacks Consensus Estimate of $5.20. Further, the bottom-line figure compares unfavorably with earnings of $6.04 per share recorded in the year-earlier quarter.

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