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IB to Aid Morgan Stanley (MS) Q1 Earnings, Trading to Hurt

The performance of Morgan Stanley’s MS trading business (constituting a significant portion of its top line) is not expected to have been impressive in the first quarter of 2024, due to lower market volatility. Thus, the company’s trading numbers are not likely to have provided much support to its quarterly results, slated to be announced before the opening bell on Apr 16.

Client activity was decent in the quarter. The expectations of a soft landing of the U.S. economy, a gradually cooling inflation and clarity on the Fed rate path drove client activity. However, volatility was low in equity markets and other asset classes, including commodities, bonds and foreign exchange.

The Zacks Consensus Estimate for the company’s equity trading revenues is pegged at $2.63 billion, indicating a decline of 3.5% from the prior-year quarter’s reported number. The consensus estimate for fixed-income trading revenues of $2.28 billion indicates a year-over-year decline of 11.6%.

Our estimates for first-quarter equity trading revenues and fixed-income trading revenues are pegged at $2.76 billion and $2.15 billion, respectively.

Other Key Factors at Play

Investment Banking (IB) Income: Following weakness in 2022 and 2023, global mergers and acquisitions bounced back in the first quarter of 2024. Both deal value and volumes witnessed a noteworthy comeback driven by solid financial performances, fading recession risks, buoyant markets and expected rate cuts this year. However, tough scrutiny by antitrust regulators and lingering geopolitical tensions continued to be concerns.

While Morgan Stanley’s position as one of the leading players in the space is likely to have provided some leverage, overall growth in advisory fees is not expected to have been impressive in the quarter.

The Zacks Consensus Estimate for advisory fees is pegged at $533 million, suggesting a year-over-year decline of 16.5%. Our estimate for the same is pinned at $626.4 million, indicating a 1.8% dip.

 The IPO market activity was decent in the first quarter on the back of robust equity market performance. This also drove some activity in follow-up equity issuances. Bond issuance volumes were bolstered by lower yields and a better operating backdrop compared with the last year. Hence, Morgan Stanley’s underwriting fees are expected to have improved somewhat in the quarter on a year-over-year basis.

The consensus estimate for fixed-income underwriting fees is pegged at $484 million, suggesting a rise of 18.9% from the year-ago reported figure. The Zacks Consensus Estimate for equity underwriting fees of $258 million indicates an increase of 27.7%. The consensus estimate for total underwriting fees of $742 million implies a rise of 21.8% from the year-ago quarter.

Our estimate for fixed-income underwriting fees is $416.9 million while equity underwriting fees is expected to be $216.7 million.

Growth in total IB income is likely to have been decent due to the expected rise in underwriting revenues. The Zacks Consensus Estimate for IB income of $1.28 billion indicates a year-over-year rise of 2.2%. Our estimate for IB income is pegged at $1.26 billion.

Net Interest Income (NII): Given some clarity on the Fed’s interest rate path for the year and high chances of a soft landing of the U.S. economy, the lending scenario improved marginally in the first quarter. Per the Fed’s latest data, while the demand for commercial and industrial loans was relatively weak, the demand for real estate and consumer loans was decent in the quarter.

The Fed kept interest rates unchanged in the first quarter at a 22-year high of 5.25-5.5%. However, despite decent loan growth and high rates, Morgan Stanley’s NII is not expected to have improved much because of the inverted yield curve and higher funding costs.

The Zacks Consensus Estimate for NII is pegged at $1.87 billion, suggesting a decline of 20.5% on a year-over-year basis. Our estimate for NII is $1.89 billion, implying a decline of 19.4%.

On a sequential basis, management expects NII in the first quarter of 2024 to be relatively stable.

Expenses: Cost reduction, which has long been the main strategy of Morgan Stanley to remain profitable, is unlikely to have provided major support in the March-ended quarter. As the company has been investing in franchises, overall costs are anticipated to have flared.

We expect first-quarter total non-interest expenses of $10.67 billion, indicating a year-over-year rise of 1.4%.

What Our Quantitative Model Predicts

According to our proven model, the chances of Morgan Stanley beating the Zacks Consensus Estimate for earnings this time are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Morgan Stanley is -0.13%.

Zacks Rank: The company currently carries a Zacks Rank of 3.

The Zacks Consensus Estimate for the company’s first-quarter earnings has remained unchanged at $1.69 per share over the past seven days. The estimate implies a 0.6% decline from the year-ago reported number.

The consensus estimate for sales is pegged at $14.47 billion, indicating a year-over-year decline of 0.3%.

Morgan Stanley Price and EPS Surprise

Morgan Stanley price-eps-surprise | Morgan Stanley Quote

Stocks to Consider

Per our model, a couple of finance stocks, which have the right combination of elements to post an earnings beat this reporting cycle are PNC Financial PNC and Truist Financial TFC.

The Earnings ESP for PNC is +0.45%. The stock carries a Zacks Rank of 3 at present. The company is slated to report first-quarter 2024 results on Apr 16.

TFC is scheduled to release first-quarter 2024 earnings on Apr 22. The company carries a Zacks Rank of 3 at present, and has an Earnings ESP of +0.83%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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