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Morgan Stanley's Q3 Earnings Buckle Under Trading Woes

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Morgan Stanley 's MS third-quarter 2015 earnings from continuing operations came in at 48 cents per share. This included positive revenues of 14 cents per share from DVA. Excluding DVA, earnings came in at 34 cents per share, down from 64 cents earned in the prior-year quarter. The Zacks Consensus Estimate was pegged at 64 cents.

Morgan Stanley - Earnings Surprise | FindTheBest

Shares of Morgan Stanley plunged more than 6% in pre-trading hours, implying that the market is discouraged with the company's results, especially its underperformance in trading revenues. Notably, the price reaction during the full trading session will give a better idea about how investors reacted to the results.

Buckling under the industry-wide trend led by overall trading weakness, Morgan Stanley recorded lower fixed-income, currency and commodities ("FICC") trading income for the first time in 2015. This triggered a decline in the overall top line, though net-interest income depicted a rise. Also, a fall in operating expenses failed to support the bottom line.

Net income applicable to Morgan Stanley was $1.02 billion, down 40% year over year.

Performance in Detail

Net revenue (excluding DVA adjustments) amounted to $7.33 billion, down 16% year over year. Also, it lagged the Zacks Consensus Estimate of $8.64 billion. After considering the positive revenues pertaining to changes in Morgan Stanley's debt-related credit spreads and DVA, net revenue fell 13% year over year to $7.77 billion.

Net interest income was $762 million, up 37% from $557 million recorded in the year-ago quarter, driven by a 17% fall in interest expenses and 5% growth in interest income. Further, total non-interest revenue of $7.01 billion decreased 16% year over year, as all components, except asset management, distribution and administration fees, witnessed deterioration.

Total non-interest expenses were $6.29 billion, down 6% year over year. Rise in non-compensation expenses, primarily led by an increase in litigation reserves, was more than offset by an 18% fall in compensation expenses.

Morgan Stanley's compensation to net revenue ratio for the reported quarter was 44% versus 47% in the year-ago quarter.

Quarterly Segmental Performance

Institutional Securities (IS): Pre-tax income from continuing operations was $688 million, down 44% year over year. Net revenue was $3.90 billion, a decline of 14% year over year.

Excluding DVA, net revenue was $3.47 billion, a fall of 19% on a year-over-year basis. The decline was largely due to lower FICC income and negative other revenues, partially offset by higher advisory revenues and stable equity sales and trading net revenue.

Wealth Management (WM): Pre-tax income from continuing operations totaled $824 million, up 3% year over year. Net revenue was $3.64 billion, down 4% year over year, driven by a fall in transactional revenues and other revenues. These were, nevertheless, partially offset by a rise in asset management fees and net interest income.

Investment Management (IM): Pre-tax loss from continuing operations was $38 million, compared with pre-tax income of 193 million in the year-ago quarter. Net revenue was $274 million, a decline of 59% year over year. The fall reflected the reversal of previously accrued carried interest pertaining to the Asia private equity business and lower results in the Traditional Asset Management business.

As of Sep 30, 2015, total assets under management or supervision were $404 billion, up 1% year over year. The business recorded net outflows of $6.4 billion in the reported quarter.

Capital

As of Sep 30, 2015, book value per share was $34.97, up from $33.16 as of Sep 30, 2014. Tangible book value per share was $29.99, up from $29.24 as of Sep 30, 2014.

Morgan Stanley's Tier 1 capital ratio Advanced (Transitional) was 15.6% versus 16.2% in the year-ago quarter and Tier 1 common equity ratio Advanced (Transitional) was 13.9% versus 14.4% in the prior-year quarter.

Share Repurchases

During the reported quarter, Morgan Stanley bought back around 17 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.

Our View

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 third-quarter results. Though overall weakness in revenues was palpable across these banks, they managed to remain profitable with the help of expense control.

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MORGAN STANLEY (MS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

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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.


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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