Trading Slump To Hurt Morgan Stanley's (MS) Q2 Earnings

Morgan Stanley’s (NYSE:MS) second-quarter 2019 results, scheduled to be announced on Jul 18, are not likely to get much support from trading activities. Thus, lower trading income, one of the major revenue components for the company, is expected to have an adverse impact on its earnings.

Similar to the previous quarter, the second quarter also witnessed a dismal trading environment. During the quarter, a few concerns, including some lingering ones like uncertainty related to Brexit and U.S.-China trade war, and expectations of global economic slowdown persisted. The Federal Reserve’s policy accommodation stance led to ambiguity as well. These concerns were enough to keep clients on sidelines.

Further, during an investors’ conference in mid-June, management projected a dismal trading picture, with trading revenues not expected to reach first-quarter 2019 levels owing to a tough start to June. CEO James Gorman noted, “The last two weeks have been quite hard. Up until then, it was solid. We’re not going to have a bad quarter in the securities business, but you’ve got to be realistic with the environment.”

Gorman further stated that trading in the second quarter has been “challenging.” Despite this, the company anticipates surpassing $4 billion in trading revenues in the quarter.

The Zacks Consensus Estimate for equity trading revenues of $2.23 billion suggests a fall of 9.9% from the year-ago reported figure. Also, the consensus estimate for fixed income trading revenues of $1.33 billion indicates a decline of 4.2%.

Hence, second-quarter trading revenues are expected to be $3.49 billion, down 7.2% year over year.

Here are the other factors that are expected to impact Morgan Stanley’s second-quarter results:

Underwriting fees to decline: Decent equity markets performance and the central banks’ dovish stance seem to have supported equity issuance across the globe. This also had a favorable impact on IPO activity during the quarter to some extent. However, fears of economic slowdown weighed on companies’ plans to raise capital by issuing shares. Thus, Morgan Stanley’s equity underwriting fees are expected to be weak. The Zacks Consensus Estimate for equity underwriting fees of $486 million indicates 10.2% year-over-year decline.

Additionally, relatively higher rates and several geopolitical concerns adversely impacted debt issuances in the to-be-reported quarter. The consensus estimate for debt underwriting fees (accounting for more than 50% of total underwriting fees for Morgan Stanley) is $455 million, suggesting a decrease of 15.7%.

All in all, total underwriting fees are projected to witness a 13% fall year over year as the consensus estimate for the to-be-reported quarter is $941 million.

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Fall in advisory fees: While dealmakers across the globe were active during the second quarter, global deal value and volume witnessed a fall due to higher borrowing costs and the above-mentioned concerns. These factors will have an adverse impact on Morgan Stanley’s advisory fees.

Nonetheless, the strong M&A deal pipeline from the previous quarters will offer some respite. Further, as Morgan Stanley is one of the leading players in this space, it will likely provide leverage to attract more business. But the consensus estimate for advisory fees is $540 million, a decrease of 12.6% from the prior-year quarter.

Net interest income not to provide much support: A dismal lending picture — particularly in the areas of commercial and industrial during the second quarter — is expected to hurt net interest income (NII) growth. The central bank’s accommodative stance along with flattening of the yield curve and steadily rising deposit betas are also expected to hurt Morgan Stanley’s NII.

Reduced 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 June-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.

Here is what our quantitative model predicts:

Our proven model shows that Morgan Stanley does not have the right combination of the two key ingredients — a positive Earnings ESP Filter .

Earnings ESP: The Earnings ESP for Morgan Stanley is 0.00%.

Zacks Rank: Morgan Stanley currently carries a Zacks Rank #4 (Sell).