Morgan Stanley (NYSE:MS) fell almost 2% following its better than expected 3Q earnings release. The company posted $0.28 per share of income from continuing operations, beating estimates of $0.24. Yet, as with all the major banks, Morgan still faces uncertainty with the pending fiscal cliff, where spending cuts and tax hikes could negatively impact a variety of the bank’s segments, including M&A and asset management.
Morgan Stanley’s earnings beat comes on the back of strong revenues from fixed income trading. The sixth-largest U.S. bank by assets beat 3Q results as as revenue from fixed-income trading almost doubled from the second quarter. The company cited not only fixed income, but also commodities sales and trading as key revenue drivers for last quarter. Overall, Morgan Stanley had a loss in excess of $1 billion, or $0.55 per share, compared to a profit of over $2 billion, or $1.15 per share, last year.
The other big name banks with earnings this week included Citigroup Inc. (NYSE:C), Wells Fargo & Company (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group, Inc. (NYSE:GS). Citi beat its 3Q estimates and is up over 10% in the last week. We believe one of the key drivers lifting the stock was the removal of CEO Vikram Pandit. S&P speculated that Pandit’s departure could have been related to Board compensation. Citi pays the lowest divided of the five stocks at 0.1% yield and with the recent stock price move now trade in line with peers on a P/B basis, with a P/B of 0.8.
Wells Fargo is down over 6% during the past week after missing revenue estimates. The company saw positive fee generation from mortgage refinancing, but lower net interest income. The company has a greater dependence on mortgage banking than its peers and may continue to see underperformance in net interest income, but it is tough to go against one of the top fund managers, Warren Buffett, who had over 18% of his 2Q 13F portfolio invested in the bank.
There’s no denying that JPMorgan is a whale of a bank, and it has Lansdowne Partners as its top fund owner, with Lansdowne having over 11% of their 2Q 13F invested in the bank. JPMorgan is up 3% this week after posting EPS of $1.40 versus estimates of $1.22. The company attributed its EPS beat to higher mortgage banking results thanks to mortgage refinancing.
Up over 5% this week, Goldman posted EPS of $2.85 versus 3Q estimates of $2.15—see whether Goldman is a good investment. Much like Morgan Stanley, Goldman saw EPS beat thanks to higher than expected income from fixed income and currency trading. However, the company saw weakness in underwriting and brokerage commissions. Over five funds have at least 4% of their 13F invested in Goldman as of 2Q—see all funds owning Goldman. Jim Simons took a new position during 2Q and D.E. Shaw upped his 1Q position by over 200%.
Overall, the investment banks are showing strong performance, while the banks relying more on mortgage banking are trading with mixed sentiment. Our one concern for Morgan Stanley is the company’s plan to shrink its fixed income trading division, which was a key revenue driver for the company last quarter. However, putting this in perspective, a JPMorgan analyst notes that although Morgan Stanley fixed income revenue doubled to $1.5 billion, it is still small when compared to Citi, making $3.7 billion on their fixed income segment, and Goldman Sachs. As well, fixed income trading requires the majority of the firm’s capital, and as a result they plan to reduce the fixed income and commodities assets from around $320 billion to $255 billion by 2015.
Another bright spot for the company is the upcoming full integration of Morgan Stanley Smith Barney, which should allow the company to see higher operating margins. For the first half of 2012, wealth management made up over 50% of total revenues. The company has growth opportunities to grow interest income in this segment, reporting net interest income as a percent of total revenues of 11%, versus its peer Charles Schwab, which had 37%. The wealth management segment also provides high recurring fees and large cash deposits for the company. For fund interest, Morgan Stanley calls Ken Fisher its top fund owner, with over 13 million shares, and Ken Griffin as one of its top three, with an over 900% increase in his 1Q stake during 2Q.
Comparing Morgan Stanley to another cheap trading major bank, Bank of America Corp (NYSE:BAC) trades at the cheapest P/B among the major banks at 0.5, while Morgan is right alongside them with a P/B of 0.6. Although these two companies may appear to trade amongst the cheapest in the industry, Bank of America has seen the largest run up in its stock of major banks, up 70% year to date—see if you should be selling Bank of America. Meanwhile Morgan Stanley is up the least, up only 20% year to date. We believe that Morgan Stanley remains one of the better buys among the banks with key initiatives that will help better position the company for the future banking regulations, and the company pays a decent 1.0% dividend yield.
