Morgan Stanley's Secret Sauce: Did RBC Just Find It?

• Shares of Morgan Stanley (NYSE: MS) have declined 16.71 percent in the last three months, hitting a low of $31.01 on September 29.
• RBC Capital’s Fiona Swaffield has upgraded the rating from Sector Perform to Outperform, with a price target of $39.
• Swaffield expects Morgan Stanley’s EPS growth to be driven by Wealth Management, especially given that the company’s deposit deployment strategy is independent of the timing of rate increases in the US.

Analyst Fiona Swaffield expects the company to see pre-tax CAGR of 16 percent during 2014-2017 and mentioned that Morgan Stanley’s deposit deployment strategy should “continue to drive net interest income growth.”

Also, with a loan to deposit ratio of 75 percent, Swaffield expects the company to witness further loan growth, at a CAGR of 29 percent during 2014-2017, as well as expanding net interest margins.

According to the RBC Capital report, “Capital return is one lever to ROTE improvement,” with the potential for it to increase gradually over time. Swaffield expects a payout, including dividends and buybacks, of 59 percent in 2015, which is expected to rise to 71 percent by 2017.

Swaffield sees the expected total yield of 6.7 percent in 2016 and 7.8 percent in 2017 as attractive.

Although Morgan Stanley has “benefited from revenue market share gains over the last year and a half especially in equities,” Swaffield expects “Institutional Securities (IS) returns to be close to the cost of equity out to 2017E.”