We have upgraded our long-term recommendation on
Morgan Stanley
(
MS
) to Neutral from Underperform. The raise is mainly based on the
company's better-than-expected fourth quarter 2011 results and its
relatively stable capital position.
Moreover, we expect Morgan Stanley's restructuring initiatives
as well as organic and inorganic growth strategies will continue to
be significant growth drivers. However, new regulatory
requirements, elevated costs, the fundamental pressures on the
banking sector and intense pricing competition are some of the
concerns that are expected to mar the company's financials over the
near term.
Morgan Stanley's fourth-quarter earnings significantly outpaced
the Zacks Consensus Estimate loss. The core results benefited from
the closure of various strategic actions, higher net interest
income and decline in non-interest expenses. However, lower net
revenues across all the segments were the primary dampeners.
Over the last several quarters, Morgan Stanley has been taking
initiatives to streamline its operations and concentrate on the
profitable core businesses. In October 2011, the company announced
the plan to divest its mortgage-servicing unit, Saxon Mortgage
Services Inc., to
Ocwen Financial Corp.
(
OCN
). We anticipate that the company will continue with restructuring
strategy to align its operations with the economic environment.
Despite the sluggish economic environment, Morgan Stanley
continues to grow through acquisitions. In May 2010, the company
announced the completion of its joint venture with
Mitsubishi UFJ Financial Group Inc.
(
MTU
) and remained committed to investing in Japanese market with the
expansion of its investment banking and securities businesses.
Additionally, we anticipate Morgan Stanley's decision to de-risk
the balance sheet by resolving its 2-year-old legal dispute with
MBIA Inc.
(
MBI
) will allow it to comply with various new regulatory requirements.
This would also free up the additional capital that can be invested
in the company's core businesses.
On the flip side, Morgan Stanley's profitability is expected be
impacted by the financial reform law due to increased costs and fee
restrictions over the near term. Also, the company will be less
flexible with regard to business investments in the near term,
given the regulatory requirement of additional surcharge for large
U.S. banks with assets of $50 billion or more under Basel III.
Despite the company's present stable capital position, we expect
restrictions to continue on capital deployment activities even
after another round of stress test, which is to be conducted by the
Federal Reserve later this year. This time the company will have an
even higher stumbling block to clear as it has significant exposure
to the stressed European countries. Overall, we do not expect
Morgan Stanley to be able to enhance shareholder value in the near
term.
Further, we remain concerned about Morgan Stanley's elevated
cost structure. Though in December 2011, the company had announced
its plan to retrench 1,600 workers in the first quarter of 2012, we
do not expect this initiative to fully control the cost as the
company continues to invest in its franchise.
Morgan Stanley currently retains a Zacks #5 Rank, indicating a
significant likelihood of downward pressure on the shares over the
near term.
MBIA INC (
MBI
): Free Stock Analysis Report
MORGAN STANLEY (
MS
): Free Stock Analysis Report
MITSUBISHI-UFJ (
MTU
): Free Stock Analysis Report
OCWEN FINL CORP (
OCN
): Free Stock Analysis Report
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