Trading, Underwriting To Aid Morgan Stanley (MS) Q4 Earnings

Morgan Stanley’s (NYSE:MS) fourth-quarter 2019 results, slated to be announced on Jan 16, are likely to get support from rebound in client activities. Therefore, a rise in trading income, one of the major revenue components for the company, is expected to have positively impacted its earnings.

The quarter witnessed a rise in client activity. This was due to ambiguity over the U.S.-China trade conflict and Brexit, expectations of global economic downturn, the Federal Reserve’s accommodative stance and strong domestic economy.

In fact, solid equity markets performance is likely to have resulted in an increase in equity trading while easing of a few macroeconomic and geopolitical concerns might have aided fixed income trading. The Zacks Consensus Estimate for equity trading revenues of $1.95 billion suggests a rise of nearly 1% from the year-ago reported figure. Also, the consensus estimate for fixed income trading revenues of $1.02 billion indicates a jump of 80.1%.

So, fourth-quarter trading revenues are pegged at $2.93 billion, up 17.9% year over year.

Here are a few other factors that are expected to have influenced Morgan Stanley’s earnings:

Higher underwriting fees: Equity issuance across the globe witnessed a rise, probably driven by strong equity markets performance and the central banks’ dovish stance. Likewise, IPO activities witnessed an uptrend during the to-be-reported quarter. Thus, Morgan Stanley’s equity underwriting fees are expected to have improved. The Zacks Consensus Estimate for equity underwriting fees of $374 million indicates 15.8% year-over-year rise.

Additionally, given the positive development on a few geopolitical concerns, bond issuance volume was solid. On the other hand, debt issuances were weak as corporate loan demand was muted despite low interest rates. The consensus estimate for debt underwriting fees (accounting for more than 50% of total underwriting fees for Morgan Stanley) is $468 million, suggesting a jump of 30%.

The consensus estimate for total underwriting fees of $842 million indicates 23.3% growth year over year.

Lower advisory income: While dealmakers across the globe were active during the fourth quarter, global M&A deal value and volume witnessed a decline. This likely had an adverse impact on Morgan Stanley’s advisory fees. Nonetheless, as the company is one of the leading players in this space, it is likely to have provided leverage.

The consensus estimate for advisory fees is $623 million, a decrease of 15.1% from the prior-year quarter.

Soft net interest income growth: A weak lending picture — particularly in the areas of commercial and industrial during the fourth quarter — is expected to have hurt net interest income (NII) growth. Further, decline in interest rates is likely to have hampered growth in Morgan Stanley’s NII.

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The company expects “a low rate and a declining rate environment” to have adversely impacted NII, partially offset by higher loan balances. For the Wealth Management segment, NII growth is expected to have been in line with the loan growth (which is projected to be mid-single-digits) in 2019.

Slight rise in costs: Expense reduction, which has long been the main strategy to remain profitable, is not likely to have been a major support in the quarter. Also, as the company might have witnessed an improvement in top line, compensation costs are likely to have risen in the to-be-reported quarter.

Management set an efficiency ratio target of less than 73% for 2019.

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 -0.51%.

Zacks Rank: Morgan Stanley currently carries a Zacks Rank #3.