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Morgan Stanley (MS) Q3 Earnings Beat on Trading Strength

Morgan Stanley’s MS third-quarter 2020 adjusted earnings of $1.59 per share easily outpaced the Zacks Consensus Estimate of $1.26. Also, the figure improved 31% from the year-ago quarter.

Results excluded net discrete tax benefit of 7 cents per share. Including this, earnings were $1.66 per share.

Shares of Morgan Stanley lost nearly 1% in pre-market trading as investors seem to be disappointed with dismal performance of fixed income underwriting and advisory businesses.

As anticipated, Morgan Stanley’s trading business delivered a solid performance. Fixed income trading revenues grew 35% year over year and equity trading income rose 14%. Thus, overall trading revenues increased 20%.

Further, the investment banking (IB) business was impressive despite weaknesses in advisory (resulting in a 35% year-over-year decline in corresponding fees) and fixed income underwriting (corresponding fees down 18%). Equity underwriting fees soared 118% from the prior-year quarter. Therefore, IB fees grew 11%.

Additionally, higher net interest income, mainly driven by a rise in loan balance (up 14%) and plunge in interest expenses supported the top line.

However, mounting operating expenses hurt the results to some extent.

Also, the company recorded provision for credit losses on loans and lending commitments of $111 million, up significantly from $51 million in the prior-year quarter. Allowance for credit losses on loans and lending commitments was $1.3 billion as of Sep 30, 2020, an increase of nearly 8% sequentially.

Net income applicable to common shareholders was $2.6 billion, which grew 26% from a year ago.

Improved Trading, Interest Income Aid Revenues, Costs Rise

Net revenues were $11.7 billion, increasing 16% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $10.3 billion.

Net interest income was $1.5 billion, which grew 22% from the year-ago quarter. This was largely due to an 82% plunge in interest expenses.

Total non-interest revenues of $10.2 billion rose 15% year over year.

Total non-interest expenses were $8.2 billion, up 12% from the prior-year number. The increase was largely due to a 15% increase in compensation and benefits cost.

Solid Segmental Performance

Institutional Securities: Pre-tax income from continuing operations was $2.05 billion, surging 57% from the prior-year quarter. Net revenues were $6.06 billion, growing 21%. The rise was mainly driven by higher equity underwriting and trading revenues, partially offset by decline in advisory and fixed income underwriting revenues.

Wealth Management: Pre-tax income from continuing operations totaled $1.12 billion, down 10% from the year-ago figure. Net revenues were $4.66 billion, increasing 7%, as higher transactional and asset management revenues were partially offset by lower net interest income.

Investment Management: Pre-tax income from continuing operations was $225 million, rising 63% from the year-ago quarter. Net revenues were $1.06 billion, up 38%. The increase was mainly attributed to a rise in asset management fees and investment revenues.

As of Sep 30, 2020, total assets under management or supervision were $715 billion, up 41% on a year-over-year basis.

Strong Capital Position

As of Sep 30, 2020, book value per share was $50.67, up from $45.49 in the corresponding period of 2019. Tangible book value per share was $44.81, up from $39.73 on Sep 30, 2019.

Morgan Stanley’s Tier 1 capital ratio was 19% compared with 18.8% in the year-ago quarter. Tier 1 common equity ratio was 16.9%, up from 16.6%.

Our Viewpoint

Morgan Stanley’s efforts to diversify operations with more focus on those that are less dependent on capital markets are commendable. The planned acquisition of Eaton Vance EV and the buyout of E*Trade Financial are steps in this direction. However, coronavirus-related concerns and economic slowdown are expected to continue hurting the company’s financials in the near term.

Morgan Stanley Price, Consensus and EPS Surprise

Morgan Stanley Price, Consensus and EPS Surprise

Morgan Stanley price-consensus-eps-surprise-chart | Morgan Stanley Quote

Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Big Banks

Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s JPM third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35.

Driven by revenue strength, Goldman Sachs GS reported third-quarter 2020 earnings per share of $9.68, significantly surpassing the Zacks Consensus Estimate of $5.58. Also, the bottom line compares favorably with the earnings of $4.79 per share recorded in the year-earlier quarter.

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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.

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