Morgan Stanley 's MS third-quarter 2018 results, slated for release on Oct 16, are not likely to get much support from muted trading activities. Thus, trading income, one of the major revenue components, is expected to have an adverse impact on the company's earnings.
After an impressive first-half 2018 performance driven by significant volatility, client activity remained low in the third quarter. Higher inflation expectation, tightening of monetary policy by the Fed, the U.S.-China trade war and a sharp sell-off in the tech sector had incited volatility. However, developments including further escalation in the trade war and some other geo-political tensions in the third quarter were inadequate to result in a significant rise in client activity.
The Zacks Consensus Estimate for equity trading revenues of $1.99 billion reflects a fall of19.6% from the prior quarter. Further, the Zacks Consensus Estimate for fixed income trading revenues of $1.14 billion indicates a decline of 17.6% on a sequential basis.
Overall, third-quarter trading revenues are expected to be $2.94 billion, plunging 21.7% from the last reported quarter.
Here are the other factors that are expected to influence Morgan Stanley's third-quarter results:
Advisory fees to show some strength: While decline in global M&A deal volume in the Jul-Sep quarter will likely hamper Morgan Stanley's advisory fees, the strong M&A deal pipeline from the previous quarters will provide modest support. Also, as the company is one of the leading players in this space, it will likely provide further leverage to attract more business. Notably, the consensus estimate for advisory fees is $597 million, down 3.4% sequentially.
Underwriting fees to decline: Seasonal slowdown is expected to hamper underwriting performance to some extent in the quarter to be reported. Moreover, global equity markets slowed down as fears of a full-blown trade war weighed on companies' plans to raise capital by issuing shares. The Zacks Consensus Estimate for equity underwriting fees of $300 million shows a slump of 44.5% from the last quarter.
Furthermore, rise in interest rates is likely to have lowered companies' involvement in debt issuance activities. As debt origination fees account for more than 50% of total underwriting fees for Morgan Stanley, this will likely have an adverse impact on overall underwriting fees. The Zacks Consensus Estimate for debt underwriting fees of $409 million reflects a sequential decrease of 24.3%.
All in all, total underwriting fees are projected to witness a 34.4% slump from the prior quarter as the consensus estimate for the to-be-reported quarter is $709 million.
A slight increase in net interest income (NII): Rise in interest rates will likely lead to an increase in interest income. Also, overall loan demand was decent - particularly in the areas of commercial and industrial. So, NII is anticipated to witness a modest improvement.
Lesser scope of cost containment: Expense reduction, which has long been the main strategy to remain profitable, is not expected to be a major support in the Sep-end quarter. But given the success of Morgan Stanley's cost-saving efforts and other restructuring initiatives, overall operating expenses are likely to remain manageable. However, as revenues are expected to increase, compensation expenses will likely witness a slight increase.
Here is what our quantitative model predicts:
Chances of Morgan Stanley beating the Zacks Consensus Estimate are high this time. This is because the stock has the right combination of two main ingredients - a positive Earnings ESP and Zacks Rank #3 (Hold) or higher - for increasing the odds of an earnings beat.
You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
Earnings ESP: The Earnings ESP for Morgan Stanley is +0.25%.
Zacks Rank: Morgan Stanley carries a Zacks Rank #3, which further increases the predictive power of ESP.
Morgan Stanley Price and EPS Surprise
Notably, the Zacks Consensus Estimate for earnings of $1.00 reflects a 7.5% growth on a year-over-year basis. Also, the consensus estimate for sales of $9.5 billion indicates 3.6% increase from the prior-year quarter.
Other Stocks Worth a Look
Here are a few other finance stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.
Hancock Whitney Corporation HWC is slated to release results on Oct 16. It has an Earnings ESP of +0.07% and carries a Zacks Rank #3. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
M&T Bank MTB has an Earnings ESP of +0.32% and carries a Zacks Rank of 3. The company is scheduled to report earnings on Oct 17.
Ameris Bancorp ABCB is set to release quarterly numbers on Oct 19. It has an Earnings ESP of +1.11% and carries a Zacks Rank of 3.
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