Morgan Stanley (MS) Beats Q2 Earnings On Equity Trading Gain

Continued strength in equity trading drove Morgan Stanley’s (NYSE:MS) second-quarter 2017 earnings of 87 cents per share, which easily surpassed the Zacks Consensus Estimate of 76 cents. The reported figure was 16% above the prior-year quarter.

Shares of Morgan Stanley have gained nearly 4% in early market trading, largely driven by impressive growth in equity trading income and investment banking. The stock’s price performance after the full day’s trading will give a better indication about investors’ sentiments.

Higher underwriting fees, growth in equity trading income and stable advisory fees were primarily responsible for the significant improvement in earnings. Also, the company’s capital ratios remained strong.

However as expected, fixed-income, currency and commodities (FICC) income declined. Further, lower net interest income (owing to a fall in corporate loans) and a rise in operating expenses acted as headwinds.

Net income applicable to Morgan Stanley was $1.8 billion, up 11% year over year.

Equity Trading Improvement Supports Revenues, Costs Rise

Net revenue amounted to $9.5 billion, a rise of 7% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.3 billion.

Net interest income was $751 million, down 18% from the year-ago quarter. This was largely due to a drastic rise in interest expenses. However, total non-interest revenues of $8.8 billion grew 7% year over year, primarily supported by improvement in trading and investments.

Total non-interest expenses were $6.9 billion, up 7% year over year. The rise was due to a 6% increase in compensation and benefits costs as well as 29% jump in other expenses.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.4 billion, down 4% year over year. Net revenue of $4.8 billion rose 4% from the prior-year quarter. The improvement was mainly driven by a significant increase in underwriting income and equity trading revenues as well as stable advisory income, partially offset by decline in FICC income.

Wealth Management: Pre-tax income from continuing operations totaled $1.1 billion, a jump of 23% on a year-over-year basis. Net revenue was $4.2 billion, up 9% year over year, driven by higher asset management fee revenues and net interest income, partly offset by a fall in transactional revenues.

Investment Management: Pre-tax income from continuing operations was $142 million, jumping 20% from the year-ago quarter. Net revenue was $665 million, a rise of 14% year over year. The increase reflected higher investment revenues and asset management fees.

As of Jun 30, 2017, total assets under management or supervision were $435 billion, up 7% on a year-over-year basis.

Strong Capital Position

As of Jun 30, 2017, book value per share was $38.22, up from $36.29 as of Jun 30, 2016. Tangible book value per share was $33.24, up from $31.39 as of Jun 30, 2016.

Morgan Stanley’s Tier 1 capital ratio Advanced (Transitional) was 18.9%, up from 18.8% in the year-ago quarter. Tier 1 common equity ratio Advanced (Transitional) was 16.6% compared with 16.8% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 12 million shares for nearly $500 million. This was part of the company's 2016 capital plan.

Dividend Hike

As part of its 2017 capital plan, Morgan Stanley announced quarterly dividend of 25 cents. This represents a 25% hike from the prior payout. The dividend will be paid on Aug 15 to shareholder of record as of Jul 31.

Our Take

Morgan Stanley’s initiatives to offload its non-core assets, in order to lower balance-sheet risks and shift focus toward less capital-incentive operations are commendable. However, continued decline in interest income despite an improving rate scenario remains a near-term concern. Also, decline in bond trading fees owing to low client activity is an issue.

Currently, Morgan Stanley has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other banking giants, JPMorgan Chase & Co. (NYSE:JPM) , Bank of America Corp. (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC) have already come out with their second-quarter results. The performance of these companies was decent.

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