Morgan Stanley Profits on Record Revenue From Trading Volatiity

Morgan Stanley on Wednesday reported record first quarter 2018 earnings before the bell beating analyst expectations. $MS followed the other major banks with surging trading and wealth revenues.

Morgan Stanley on Wednesday reported record first quarter 2018 earnings before the bell beating analyst expectations. $MS followed the other major banks with surging trading and wealth revenues.

Earnings

Net income rose to $2.67 billion from $1.84 billion a year earlier. Earnings per share rose to $1.45, beating the $1.26 average estimate of analysts said FactSet. Revenues increased 14% y-o-y and rose 17% sequentially to a record $11.1bn. Results included a recurring-type of discrete tax benefit of $147mn ($0.08) associated with employee share-based payments.

 

Reaction > Morgan Stanley NYSE: $MS

Pre-market 53.75 +0.51 (0.96%)

“Each of our businesses performed well, with significant client engagement across our global franchise, and sales and trading a particular highlight in a more active environment,” CEO James Gorman said in the statement.

Earnings Highlights

  • Stock-trading revenue increased by 27% from a year earlier to $2.56 billion,
  • Fxed-income trading revenue increased by 9% from last year to $1.87 billion
  • investment management rose by 18% 
  • Wealth management rose by 8% 
  • IB fees rose by +7% 
  • Expenses increased 10% y-o-y and grew 9% linked quarter, resulting in 400bps of y-o-y positive operating leverage.
  • Comp ratio was 44%, down from 45% in the prior quarter and 46% in 1Q17.
  • It posted an ROE of 14.9% and ROTCE of 17.2%.

Share Repurchases

For the 3rd straight quarter, it repurchased $1.25mn shares, a pace we expect to finish its CCAR 2017 plan in 2Q18.

The bank rally had been fueled by expectations for easier regulations including a possible repeal of DoddFrank and infrastructure spending. The Federal Reserve decision to raise rates has also helped banks.  The new surge in home prices has also buoyed optimism for the mortgage business and banks profits thereto. Tax cuts, a stronger economy and higher interest rates have helped banks’ earnings. Bank of America reported results on Monday.

UPDATE: Barclays Upgrades, Morgan Stanley Issues Note After Earnings

  • Stock Rating: Equal Weight
  • Industry View: Positive
  • Price Target: USD 63.00
  • Price (18 Apr 2018) USD 53.26
  • EPS FY1 (E) 4.90EPS FY2 (E)5.35
  • Market Cap (USD bn) 94.4805

Bottom line:

Broad-based revenues growth, positive operating leverage, and a lower comp ratio drove EPS above consensus and pushed its ROE toward the 15% area. Relative to consensus, revenues in trading (both FICC and equities), IB (advisory, ECM and DCM) and investment management all came in above expectations, while wealth management was below (though its pre-tax margin and flows were solid).

After unveiling new targets including a 10-13% ROE (11.5-14.5% ROTCE), a 26-28% WM pre-tax margin and a sub-73% efficiency ratio on last quarter’s conference call, MS exceeded all these metrics on the first try. Trading at 1.6x tangible book, the market seems to reflect expectations of improved performance. Still, language regarding capital distribution in CCAR 2018 appeared more cautious.

Estimates:

Following better-than-expected results this quarter, we are raising our 2018 EPS estimate by $0.25 to $4.90 as volatility to start the year has been supportive of trading revenues. We are raising our 2019 EPS estimate by $0.10 to $5.35.

Our price targets is $63 (+$1)

Morgan Stanley’s results follow earnings on Friday from following money center banks JPMorgan Chase $JPM. Wells Fargo $WFC, PNC Financial $PNC and  $C.  Bank of America $BAC and Goldman Sachs $GS reported bouyant results on Monday and Tuesday..

Source: MS, AlphaStreet

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