Legal reserves of $1.2 billion weighed on
) fourth-quarter earnings in a significant manner. The company's
earnings from continuing operations fell 79% year over year to 7
cents per share.
However, excluding debt-related credit spreads and Debt Valuation
Adjustment (DVA), legal reserves and discrete tax benefit,
earnings of 50 cents per share outpaced the Zacks Consensus
Estimate of 43 cents. Thus, Morgan Stanley was able to continue
with its trend of delivering positive earnings surprises since
the last five quarters.
Shares of Morgan Stanley gained nearly 2% in the pre-trading
session, indicating investors' positive response following the
earnings release. The movement of the stock price when the
trading session opens will give a better idea about whether
Morgan Stanley has been able to meet expectations.
Growth in net interest income and fee income were positives for
the quarter. Moreover, increase in net revenue across all
segments and improved asset position were the other tailwinds.
However, a significant increase in operating expenses and decline
in Fixed Income & Commodities sales and trading results were
For full-year 2013, earnings from continuing operations came in
at $1.66 per share, up 1% from the prior year. However, it lagged
the Zacks Consensus Estimate of $2.00.
Performance in Detail
Net revenue (excluding DVA adjustments) for the quarter was $8.2
billion, up 9% year over year. Moreover, it outpaced the Zacks
Consensus Estimate of $8.0 billion. After taking into
consideration the negative revenues pertaining to changes in
Morgan Stanley's debt-related credit spreads and DVA, net revenue
grew 11% year over year to $7.8 billion.
Net interest income was $282 million in the reported quarter, up
63% from the year-ago quarter driven by 37% fall in interest
expenses. Further, total non-interest revenue increased 11% year
over year to $7.5 billion. All the non-interest income components
grew from the prior-year quarter.
Total non-interest expenses were $7.9 billion, up 29% from the
previous-year quarter. The rise was primarily due to increase in
legal reserves of $1.2 billion for mortgage-related matters.
Morgan Stanley's compensation to net revenue ratio for the
reported quarter was 51% versus 52% in the year-ago quarter.
Quarterly Segment Performance
Institutional Securities (IS): Legal reserves of $1.2
billion led to pre-tax loss from continuing operations of $1.1
billion, compared with pre-tax income of $78 million in the
prior-year quarter. Net revenue was $3.3 billion, up 8% from the
year-ago quarter. Further, excluding DVA, net revenue was $3.7
billion, rising 3% on a year-over-year basis.
Wealth Management (WM): Pre-tax income from continuing operations
was $709 million, increasing 26% from $562 million in the
year-ago quarter. Net revenue was $3.7 billion, improving 12%
from the year-ago quarter driven by rise in asset management fees
and transactional revenues.
Investment Management (IM): Pre-tax income from continuing
operations was $337 million, up 52% year-over-year. Net revenue
was $842 million, up 41% from the year-ago quarter. The rise was
driven by gains on investments in Merchant Banking and improved
results from Traditional Asset Management.
As of Dec 31, 2013, total assets under management or supervision
were $373 billion, up 10% from $338 billion as of Dec 31, 2012.
The rise primarily reflected positive flows and market
As of Dec 31, 2013, book value per share was $32.29, up from
$30.70 as of Dec 31, 2012. Tangible book value per share was
$27.21, up from $26.86 as of Dec 31, 2012.
Morgan Stanley's Tier 1 capital ratio was 15.7% and Tier 1 common
capital ratio was 12.8% compared with 17.7% and 14.6%,
respectively in the year-ago quarter.
During the reported quarter, Morgan Stanley bought back nearly
7.6 million shares for $228 million. Hence, for the full year,
the company repurchased approximately 12.2 million shares worth
Earlier in Jul 2013, the company had received no objection from
the Federal Reserve to buy back shares. The company has
authorized repurchase of shares worth up to $500 million through
Mar 31, 2014.
Performance of Other Major Banks
Among other banking giants,
Wells Fargo & Co.
Bank of America Corp.
) reported better-than-expected third-quarter results, upholding
the image of the banking sector.
Banks have been reporting strong results primarily on the back of
favorable macroeconomic elements. Reduced non-interest expenses
and lower provision have been the primary growth drivers for
Among other major banks,
) is scheduled to release its earnings on Jan 23.
Morgan Stanley's initiatives to offload its non-core assets for
lowering balance sheet risks and shifting focus on the less
capital incentive IM and WM segments are commendable. Further,
the full control of Morgan Stanley Wealth Management JV will help
to diversify the company's revenue base and stabilize its
earnings, going forward.
Also, in Dec 2013, the company took a step in the right
direction by distancing itself from commodities operations by
announcing the sale of its Global Oil Merchanting unit to
Russia-based Rosneft Oil Company.
BANK OF AMER CP (BAC): Free Stock Analysis
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MORGAN STANLEY (MS): Free Stock Analysis
WELLS FARGO-NEW (WFC): Free Stock Analysis
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Additionally, the approval of Morgan Stanley's steady capital
deployment activities reinforces its strong capital position.
There are also high chances of dividend hikes in the future,
provided the company receives the Fed's consent for the same.
Moreover, Morgan Stanley's organic and inorganic growth
initiatives continue to be significant growth drivers. The
company remains focused on diversifying its revenue base by
expanding footprint in economies that are comparitively less
affected by the financial crisis and European debt crisis.
However, there are concerns related to Morgan Stanley's
financials being pressured by new regulatory requirements and
intense pricing competition. Moreover, stringent capital norms
may somewhat lower the company's flexibility with respect to its
investments and lending volumes.
An investor with the ability to absorb risks related to market
volatility will not likely be disappointed with investments in
Morgan Stanley in the long run. The company's fundamentals are
highly promising with a diverse business model, a stable balance
sheet and strong capital position.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold).