It has been about a month since the last earnings report for Morgan Stanley (MS). Shares have lost about 0.7% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Morgan Stanley due for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Morgan Stanley Q2 Earnings Beat Estimates on IB, Trading Strength
Morgan Stanley’s second-quarter 2020 adjusted earnings of $2.04 per share hugely surpassed the Zacks Consensus Estimate of $1.17. Also, the figure improved 66% from the year-ago quarter.
The company’s trading business delivered a stellar performance. Fixed income trading revenues soared 168% year over year and equity trading income grew 23%. Thus, overall trading revenues jumped 68% from the year-ago period.
Further, the IB business was impressive, despite weakness in advisory (resulting in a 9% year-over-year decline in corresponding fees). Equity underwriting fees jumped 62%, while fixed income underwriting revenues surged 68% from the prior-year quarter. Therefore, IB fees rose 39% from the year-ago quarter.
Additionally, higher net interest income — driven by a rise in loan balance (up 14%) and lower interest expenses — supported the top line.
However, mounting operating expenses hurt the results to some extent. The company recorded provision for credit losses on loans and lending commitments of $239 million, up significantly from $18 million in the prior-year quarter.
Net income applicable to common shareholders during the quarter was $3.05 billion, which grew 50% from a year ago.
Improved Trading Aids Revenues, Costs Rise
Net revenues were $13.41 billion, surging 31% from the prior-year quarter. Moreover, the top line beat the Zacks Consensus Estimate of $10.78 billion.
Net interest income was $1.6 billion, which jumped 55% from the year-ago quarter. This was largely due to a 78% plunge in interest expenses.
Total non-interest revenues of $11.81 billion grew 28% year over year.
Total non-interest expenses were $9.06 billion, up 23% from the prior-year number. The increase was largely due to a 33% increase in compensation and benefits cost.
Solid Segmental Performance
Institutional Securities: Pre-tax income from continuing operations was $2.99 billion, growing substantially from $1.46 billion in the prior year quarter. Net revenues were $7.98 billion, soaring 56% year over year. The rise was mainly driven by higher IB and trading revenues.
Wealth Management: Pre-tax income from continuing operations totaled $1.14 billion, down 8% from the year-ago figure. Net revenues were $4.68 billion, increasing 6% year over year, as higher transactional revenues and a slight increase in net interest income were partially offset by lower asset management revenues.
Investment Management: Pre-tax income from continuing operations was $216 million, rising 9% from the year-ago quarter. Net revenues were $886 million, up 6% from the prior-year level. The increase was mainly attributed to a rise in asset management fees, partially offset by lower investment revenues.
As of Jun 30, 2020, total assets under management or supervision were $665 billion, up 34% on a year-over-year basis.
Strong Capital Position
As of Jun 30, 2020, book value per share was $49.57, up from $44.13 in the corresponding period of 2019. Tangible book value per share was $43.68, up from $38.44 in the comparable year-ago period.
Morgan Stanley’s Tier 1 capital ratio was 18.1% compared with 18.3% in the year-ago quarter. Tier 1 common equity ratio was 16.1%, down from 16.3% in the prior year.
Guidance
The company expects integration and acquisition-related expenses to erode margins by 50-100 basis points (bps) in the third quarter of 2020.
Also, NII is anticipated to decline in the remaining half of 2020.
The company expects 2020 core tax rate to be 22-23%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates flatlined during the past month.
VGM Scores
At this time, Morgan Stanley has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
Morgan Stanley has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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