Morgan Stanley Earnings in an Accelerating Credit Cycle

Morgan Stanley report third quarter earnings before the bell Friday with lower-than-expected revenue from investment banking likely. $MS release earnings ahead of major competitor Goldman Sachs and four of the largest U.S. lenders JP Morgan, Wells Fargo, Citigroup and PNC. Last quarter Morgan Stanley’s trading segment helped out as fixed-income revenue surged amid heightened volatility and clients repositioning their books as interest rates surged higher across the curve.

Morgan Stanley

Morgan Stanley NYSE: MS Reported Before Open Friday

$1.52 EPS AND $13.24 Billion Forecast in Revenue

Morgan Stanley Earnings Preview

Q3 2022 earnings release at 7:30 a.m. ET; conference call at 9:30 a.m. ET

  • Projected EPS: $1.52
  • Projected revenue: $13.24 billion

Investment Banking Losses

JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.

Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.

U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.

The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.

“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.

Analysts Outlook on Banks

Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.

Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB).

Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.

Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).

Higher rates increase margins

The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses.  The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.

MS Q2 2022 Earnings Recap

  • Morgan Stanley revenue slid 11% to $13.1 billion, compared with estimates of $13.3 billion.
  • Net income was $1.39 per share, or $1.44 on an adjusted basis. Analysts were expecting $1.57.
  • Wealth management reported revenue of $5.74 billion in the second quarter, down 5.9% from a year earlier.
  • Net new assets fell 26% to $52.9 billion.
  • Investment-management posted $1.41 billion in revenue, down 17%.
  • Trading revenue of $5.46 billion surpassed the $5.1 billion average estimate, and up from $4.51 billion a year ago. Powered by a 49% jump in fixed-income revenue, which climbed to $2.5 billion.
  • Revenue from equity underwriting plunged to $148 million
  • Debt underwriting declined 49% to $326 million.
  • Advisory revenue fell 9.9% to $598 million.

“It was a very solid quarter in the face of market volatility,” Chief Financial Officer Sharon Yeshaya said in an interview. “Market activity and client activity should help support the level in equities and fixed-income businesses. But the volatility delays some of the pipeline to convert on the investment-banking side, especially on the M&A side.”

E Trade and Eaton Vance Aquisition’s

Morgan Stanley’s acquisition of E*TRADE continues reward the banks as the record-setting stock market is drawing in waves of new capital to the online brokerage company. The bank spent $13 billion to acquire E-Trade to further its reach with the mass affluent, and $7 billion to buy Eaton Vance to bulk up its investment management business.

On Feb. 20, 2020, Morgan Stanley agreed to acquire E-Trade Financial (ETFC) in a $13 billion, all-stock deal. The Wall Street investment bank said the purchase would add E-Trade’s consumer-oriented business to its advisor-driven model. The deal closed in Q4, 2020

Wealth management, which Morgan Stanley expanded through the acquisition of ETrade, increased revenues.

From The TradersCommunity Research Desk

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