Morgan Stanley Keeps Earnings Streak Alive - Analyst Blog

Morgan Stanley's MS earnings per share from continuing operations of 68 cents outpaced the Zacks Consensus Estimate and prior-year quarter figure of 60 cents, reflecting top-line growth. Moreover, this was the seventh consecutive quarter in which the company delivered a positive earnings surprise.  

Shares of Morgan Stanley gained nearly 3% in the pre-trading session, indicating investors' positive response following the earnings release. The movement of the stock price when the trading session opens will give a better idea about whether Morgan Stanley has been able to meet expectations.

Results benefited from rise in both net interest and fee income, partially offset by a slight increase in operating expenses. Moreover, increase in net revenue across all segments and improved asset position were the other positives.

However, including debt-related credit spreads and Debt Valuation Adjustment DVA, net income from continuing operations was $1.5 billion or 72 cents per share. This was significantly up from $981 million or 49 cents per share in the year-ago quarter.

Performance in Detail

Net revenue (excluding DVA adjustments) for the quarter was $8.8 billion, up 4% year over year. Moreover, it outpaced the Zacks Consensus Estimate of $8.6 billion. After taking into consideration the positive revenues pertaining to changes in Morgan Stanley's debt-related credit spreads and DVA, net revenue grew 10% year over year to $8.9 billion.

Net interest income was $308 million in the reported quarter, up 69% from the year-ago quarter driven by 14% fall in interest expenses. Further, total non-interest revenue increased 8% year over year to $8.6 billion. All the non-interest income components grew from the prior-year quarter.

Total non-interest expenses were $6.6 billion, up 1% from the previous-year quarter. The rise was primarily due to increase in brokerage, clearing and exchange fees, compensation and benefits expenses and marketing and business development expenses, partially offset by lower occupancy and equipment costs as well as other expenses.

Morgan Stanley's compensation to net revenue ratio for the reported quarter was 48% versus 52% in the year-ago quarter.

Segment Performance

Institutional Securities (IS): Pre-tax income from continuing operations was $1.4 billion, up 69% from the prior-year quarter. Net revenue was $4.6 billion, up 13% from the year-ago quarter. Further, excluding DVA, net revenue was $4.5 billion, rising 2% on a year-over-year basis.

Wealth Management WM: Pre-tax income from continuing operations was $691 million, increasing 16% from $597 million in the year-ago quarter. Net revenue was $3.6 billion, improving 4% from the year-ago quarter driven by rise in asset management fees, partially offset by a fall in transactional revenues.

Investment Management IM: Pre-tax income from continuing operations was $263 million, up 41% year over year. Net revenue was $740 million, up 15% from the year-ago quarter. The rise was driven by gains on investments in Merchant Banking and improved results from Traditional Asset Management. These were partially offset by lower gains on investments in Real Estate Investing.

As of Mar 31, 2014, total assets under management or supervision were $382 billion, up 12% from $341 billion as of Mar 31, 2013. The rise primarily reflected positive flows and market appreciation.

Capital Ratios

As of Mar 31, 2014, book value per share was $32.38, up from $31.21 as of Mar 31, 2013. Tangible book value per share was $27.41, up from $27.38 as of Mar 31, 2013.

Morgan Stanley's Tier 1 capital ratio (transitional) was 15.6% versus 13.9% in the year-ago quarter and Tier 1 common capital ratio (transitional) was 14.1% versus 11.5% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back nearly 4.9 million shares for nearly $150 million. Further, following the Federal Reserve's approval of its 2014 capital plan, the company announced share repurchase of up to $1 billion of common stock, beginning from the second quarter of 2014 through the first quarter of 2015.

Dividend

Along with the earnings release, Morgan Stanley announced a 50% hike in its quarterly dividend to 10 cents per share. The dividend will be paid on May 15 to shareholders of record as on Apr 30.

Our Take

Morgan Stanley's initiatives to offload its non-core assets for lowering balance sheet risks and shifting focus on the less capital incentive IM and WM segments are commendable. Further, the full control of Morgan Stanley Wealth Management JV has aided diversifying the company's revenue base. This will, in turn stabilize its earnings going forward.

Further, Morgan Stanley received approval of its 2014 capital plan from the Federal Reserve, which depicts strong capital position. Moreover, enhanced capital deployment activities continue to boost shareholders' value.

Additionally, Morgan Stanley's organic and inorganic growth initiatives continue to be significant growth drivers. The company remains focused on diversifying its revenue base by expanding footprint in emerging economies.

However, there are concerns related to Morgan Stanley's financials being pressured by new regulatory requirements and intense pricing competition. Also, stringent capital norms may somewhat lower the company's flexibility with respect to its investments and lending volumes. Nevertheless, the company's fundamentals are highly promising with a diverse business model, a stable balance sheet and strong capital position.

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).

Performance of Other Major Banks

Among other banking giants, Wells Fargo & Co. WFC and Citigroup Inc. C reported better-than-expected results, upholding the image of the banking sector. However, JPMorgan Chase & Co. JPM started the season with a significant miss due to its inability to endure the tough industry circumstances.

Though the impact of sluggishness in the industry is evident in the results of banks so far, the strength to dodge such headwinds appears much better than expected. Both Wells Fargo and Citigroup could override the challenges and beat estimates with ease.