A month has gone by since the last earnings report for Morgan Stanley (MS). Shares have lost about 6.6% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Morgan Stanley Q1 Earnings Beat on Higher NII
Morgan Stanley’s first-quarter 2023 earnings of $1.70 per share surpassed the Zacks Consensus Estimate of $1.67. The bottom line, however, reflects a decline of 16% from the year-ago quarter. Our estimate for earnings was $1.69.
An increase in net interest income (NII), driven by a rise in total loan balance (up 7% year over year) and higher interest rates, majorly supported the top line.
As expected, the performance of the IB business was weak. Equity underwriting fees decreased 22% from the prior-year quarter and fixed-income underwriting declined 6%. Advisory fees were down 32%. Therefore, IB fees declined 24%.
Further, Morgan Stanley’s trading business wasn’t able to capitalize on huge volatility and client activity. Fixed-income trading revenues decreased 12% and equity trading income declined 14%.
Higher operating expenses and provisions were the other headwinds during the quarter.
Net income applicable to common shareholders was $2.84 billion, down 20% from the year-ago quarter. Our estimate for the metric was $2.73 billion.
Revenues Decline, Expenses Rise
Quarterly net revenues were $14.52 billion, down 2% from the prior-year quarter. The top line beat the Zacks Consensus Estimate of $13.91 billion. Our estimate for revenues was $13.47 billion.
NII was $2.35 billion, up 6%. The upside was largely driven by a rise in interest income, partly offset by higher interest expenses. We had projected NII of $2.42 billion for the first quarter.
Total non-interest revenues of $12.17 billion decreased 3%. Our estimate for the metric was $11.05 billion.
Total non-interest expenses were $10.52 billion, up 4%. Our estimate for expenses was $9.65 billion.
Provision for credit losses was $234 million in the first quarter, up significantly from $57 million recorded in the prior-year quarter.
Quarterly Segment Performance
Institutional Securities: Pre-tax income was $1.89 billion, down 32% from the prior-year quarter. Our estimate for the same was $1.88 billion. Net revenues were $6.8 billion, down 11%. We had projected total revenues of $6.1 billion. The downside resulted from a fall in investment banking revenues and fixed-income and equity trading revenues.
Wealth Management: Pre-tax income totaled $1.71 billion, up 9% year over year. Our estimate for the same was $1.67 billion. Net revenues were $6.56 billion, up 11%, driven by higher net interest income. We had projected total revenues of $6.16 billion.
Total client assets were $4.56 trillion as of Mar 31, 2023, down 6% year over year.
Investment Management: Pre-tax income was $166 million, falling 27% from the year-ago quarter. Our estimate for the same was $200.7 million. Net revenues were $1.29 billion, down 3%. The fall was due to a decline in asset management and related fees, partly offset by a rise in performance-based income and other income. We had projected total revenues of $1.34 billion.
As of Mar 31, 2023, total assets under management or supervision were $1.36 trillion, down 6% from Mar 31, 2022.
Capital Position Strong
As of Mar 31, 2023, the book value per share was $55.13, down from $54.18 in the corresponding period of 2022. The tangible book value per share was $40.68, down from $39.91 as of Mar 31, 2022.
Morgan Stanley’s Tier 1 capital ratio (advanced approach) was 17.5% compared with 17.6% in the year-ago quarter. Common equity Tier 1 capital ratio was 15.6%, down from 15.9% a year ago.
Share Repurchase Update
In the reported quarter, Morgan Stanley repurchased 16 million shares for $1.5 billion.
Management anticipates incurring nearly $325 million of additional integration-related costs. These are likely to be evenly spread across quarters, with almost 2/3rd related to E*Trade and 1/3rd related to Eaton Vance.
Management expects no further expansion in quarterly NII going forward.
The tax rate is expected to be almost 23%.
The company expects an ROTCE of 20% or more. The efficiency ratio is expected to be less than 70%.
For the WM segment, the pre-tax margin is projected at more than 30%. Across the WM and IM segments, total client assets are expected to be $10 trillion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
The consensus estimate has shifted -8.5% due to these changes.
At this time, Morgan Stanley has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Morgan Stanley has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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