Morgan Stanley 's MS fourth-quarter 2015 adjusted earnings from continuing operations of 43 cents per share outpaced the Zacks Consensus Estimate of 35 cents. The quarter's earnings also reflected a significant improvement from the loss of 99 cents per share incurred in the prior-year quarter.
The reported quarter excluded negative revenue of 4 cents per share pertaining to changes in Morgan Stanley's debt-related credit spreads and DVA.
For 2015, earnings from continuing operations (excluding DVA) were $2.70 per share, 94% above $1.39 earned in the prior year. Results included net discrete tax benefits. In comparison, the Zacks Consensus Estimate was $2.38.
Shares of Morgan Stanley gained nearly 5% in pre-trading hours, implying positive market reaction to the company's results. However, the stock's price performance during the day's trading will be a better indicator of investor sentiments.
Given the industry-wide trading weakness owing to lower client activity, a shift toward electronic trading and stringent regulatory requirements, Morgan Stanley recorded lower fixed-income, currency and commodities ("FICC") trading income in this quarter as well. However, an increase in net interest income and a fall in operating expenses resulted in better-than-expected results, partly offset by a reduction in non-interest revenue.
Results for the quarter included negative revenue related to DVA. After considering this, net income applicable to Morgan Stanley was $908 million compared with a net loss of $1.6 billion in the year-ago quarter.
For 2015, net income applicable to Morgan Stanley came in at $6.1 billion, up from $3.5 billion in the prior-year quarter.
Performance in Detail
Net revenue amounted to $7.74 billion, almost flat year over year. However, it surpassed the Zacks Consensus Estimate of $7.32 billion. Moreover, net revenue (excluding DVA adjustments) came in at $7.86 billion, up 4% year over year.
For 2015, net revenue totaled $35.2 billion, up 3% from 2014. Moreover, the figure outpaced the Zacks Consensus Estimate of $34.2 billion. Excluding DVA, net revenues summed $34.5 billion, up 3% from the comparable 2014 number.
Net interest income was $1.04 billion, up 72% from $603 million recorded in the year-ago quarter, driven by a 43% fall in interest expenses and 5% growth in interest income. Meanwhile, total non-interest revenue of $6.70 billion decreased 6% year over year, as all components, except trading and investments, witnessed deterioration.
Total non-interest expenses were $6.30 billion, down 41% year over year. The fall is attributable to a 53% decline in non-compensation expenses and a 28% reduction in compensation and benefits.
Morgan Stanley's compensation to net revenue ratio for the reported quarter was 47% versus 66% in the year-ago quarter.
Quarterly Segmental Performance
Institutional Securities (IS): Pre-tax income from continuing operations was $548 million compared with a loss of $3.66 billion in the year-ago quarter. Net revenue was $3.42 billion, almost flat year over year.
Excluding DVA and the FVA charge in the prior-year quarter, net revenue came in at $3.5 billion, down from $3.7 billion in the year-ago quarter. The rise was mainly owing to higher advisory revenues as well as equity sales and trading net revenue, partially offset by lower FICC income.
Wealth Management (WM): Pre-tax income from continuing operations totaled $768 million, up 4% year over year. Net revenue was $3.75 billion, down 1% year over year, due to a fall in transactional revenues. These were, nevertheless, partially offset by a rise in net interest income.
Investment Management (IM): Pre-tax income from continuing operations was $123 million, compared with pre-tax loss of $6 million in the year-ago quarter. Net revenue was $621 million, up 6% year over year. The rise reflected higher results in the Merchant Banking and Real Estate Investing business, partly offset by lower results in Traditional Asset Management.
As of Dec 31, 2015, total assets under management or supervision were $406 billion, up 1% year over year.
As of Dec 31, 2015, book value per share was $35.24, up from $33.25 as of Dec 31, 2014. Tangible book value per share was $30.26, up from $28.26 as of Dec 31, 2014.
Morgan Stanley's Tier 1 capital ratio Advanced (Transitional) was 17.3% versus 14.1% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 15.4% versus 12.6% in the prior-year quarter.
During the reported quarter, Morgan Stanley bought back around 19 million shares for nearly $625 million. This was part of the share buyback program announced by the company, under which shares worth up to $3.1 billion can be repurchased through the second quarter of 2016.
Morgan Stanley's initiatives, to offload its non-core assets in order to lower balance-sheet risks and shift focus toward less capital-incentive IM and WM segments, are commendable. Also, a full control of Morgan Stanley Wealth Management joint venture continues to aid the diversification of the company's revenue base.
Additionally, Morgan Stanley has been moving away from its commodity trading business. Heightened regulatory scrutiny, higher capital requirements and waning profits are the primary reasons behind its decision to shed these once-lucrative operations.
Morgan Stanley's organic and inorganic initiatives continue to act as significant growth drivers. The company remains focused on diversifying its revenue base by expanding footprint in emerging economies.
However, concerns related to new regulatory requirements and intense pricing competition persist, exerting pressure on Morgan Stanley's financials. Further, trading woes across the industry make us apprehensive. Also, stringent capital norms may somewhat reduce the company's flexibility with respect to its investments and lending volumes.
Currently, Morgan Stanley carries a Zacks Rank #4 (Sell).
Among other banking giants, JPMorgan Chase & Co. JPM , Bank of America Corp. BAC and Citigroup Inc. C have come out with fourth-quarter results. The companies posted profits on the back of expense control and revenue growth.
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