Morgan Stanley (MS) Beats Q4 Earnings Amid Trading Weakness

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Amid trading slowdown, higher interest income and improvement in underwriting fees drove Morgan Stanley 's MS fourth-quarter 2017 adjusted earnings of 84 cents per share, which handily outpaced the Zacks Consensus Estimate of 77 cents. The reported figure was 14% above the prior-year quarter.

Shares of Morgan Stanley have gained more than 1.5% in pre-market trading , largely driven by impressive investment banking performance. The stock's price performance after the full day's trading will give a better indication about investors' sentiments.

Solid underwriting fees (up 42%) and higher net interest income were largely responsible for the improved results. Also, the company's capital ratios remained strong.

However, as expected, fixed-income, currency and commodities income (down 45%) and equity trading income declined (down 2%). Also, lower advisory fees were an undermining factor.

After considering a net discrete tax provision, net income applicable to Morgan Stanley was $686 million or 29 cents per share.

For 2017, adjusted earnings of $3.60 per share beat the Zacks Consensus Estimate of $3.58. Also, it was up 25% year over year. After considering a net discrete tax provision, net income available to common shareholders was $6.2 billion or $3.09 per share.

Rise in Investment Banking Aids Revenues, Costs Rise

Net revenues amounted to $9.5 billion, a rise of 5% from the prior-year quarter. In addition, it surpassed the Zacks Consensus Estimate of $9.1 billion.

For 2017, net revenues were up 10% from the prior year to $37.9 billion. The figure was above the Zacks Consensus Estimate of $37.5 billion.

Net interest income was $995 million, up 13% from the year-ago quarter. This was largely driven by a rise in interest income. Also, total non-interest revenues of $8.5 billion grew 5% year over year, primarily supported by improvement in investments.

Total non-interest expenses were $7 billion, up 4% year over year. The rise was due to a 5% increase in compensation and benefits costs.

Quarterly Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $1.2 billion, down 7% year over year. Net revenues of $4.5 billion fell 2% from the prior-year quarter. The decline was mainly due to lower trading income and advisory revenues, partially offset by increase in underwriting income.

Wealth Management: Pre-tax income from continuing operations totaled $1.2 billion, a jump of 29% on a year-over-year basis. Net revenues were $4.4 billion, up 10% year over year, driven by higher asset management fee revenues, net interest income and transactional revenues.

Investment Management: Pre-tax income from continuing operations was $80 million, surging significantly from the year-ago quarter. Net revenues were $637 million, a rise of 27% year over year. The increase reflected higher investment revenues and asset management fees.

As of Dec 31, 2017, total assets under management or supervision were $482 billion, up 16% on a year-over-year basis.

Strong Capital Position

As of Dec 31, 2017, book value per share was $38.54, up from $36.99 as of Dec 31, 2016. Tangible book value per share was $33.48, up from $31.98 as of Dec 31, 2016.

Morgan Stanley's Tier 1 capital ratio Advanced (Transitional) was 20.0%, up from 19.0% in the year-ago quarter. Tier 1 common equity ratio Advanced (Transitional) was 17.5% compared with 16.9% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 25 million shares for nearly $1.25 billion. This was part of the company's 2017 capital plan.

Our Take

Morgan Stanley's initiatives to offload its non-core assets to lower balance-sheet risks and shift focus on less capital-incentive operations like wealth management are commendable. Further, steady improvement in investment banking income will support its top line. However, a decline in bond trading fees owing to low client activity is an issue.

Morgan Stanley Price, Consensus and EPS Surprise

Morgan Stanley Price, Consensus and EPS Surprise | Morgan Stanley Quote

Currently, Morgan Stanley has a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Among banking giants, JPMorgan Chase & Co. JPM , Bank of America Corp. BAC and Citigroup Inc. C have already come out with their fourth-quarter results. The performance of these companies was impressive despite the trading slump.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: JPM , C , BAC , MS

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