Morgan Stanley (MS): Is it the Best Bank to Buy?

Morgan Stanley (NYSE:MS) is expected to experience a revenue declination of 18% this fiscal year, but should see revenue growth of 22% by the end of FY2013, thanks to a rebound in sales and trading. One of the key growth initiatives for Morgan Stanley is its global wealth management operations, which have grown to account for 50% of total revenues, compared to 30% in 2007.

Another key growth opportunity is its ability to generate net interest income from this segment, where NII as a percent of revenue was 11% in 2011. We believe Morgan Stanley has room to grow this margin, especially when comparing it to wealth management peer Charles Schwab – where 35% of total revenue is derived from net interest income. With the purchase of Citi’s remaining stake of Smith Barney, Morgan Stanley will have one of the top retail platforms and should have less of a dependence on trading revenues.

Another plus for Morgan Stanley investors is the bank’s ability to enhance shareholder value by increasing its dividend and repurchasing shares. MS currently sports dividend yield of 1%, but has over $18 billion in cash. Morgan Stanley has also managed to lower its balance sheet risk, thanks in part to a focus on less capital-intensive businesses.

From a valuation standpoint, Morgan Stanley trades at one of the cheapest book multiples in the industry at 0.6x. What’s more is that the stock trades at one of the cheapest forward P/E ratios at only 9x. Also boding well for the bank is its 15% long-term expected EPS growth. We believe Morgan’s industry-low valuation, coupled with robust growth prospects, makes it one of the best value buys in the banking business. Billionaire Steven Cohen of SAC Capital is one of Morgan Stanley’s big-name investors (check out Steven Cohen’s biggest bets).

Citigroup Inc. (NYSE:C) is expected to grow revenues 8% in 2013 on the back of expected 10% loan growth. Citi is also a relatively cheap stock showing marked improvement, with 1.85% of loans in non-accrual status as of 3Q, down from 1.90% a year ago. 3Q results were strong, where loans increased 11% year over year and global deposits were up 5%. Citi also trades near the bottom of the industry at 0.6 times book, but its long-term expected EPS growth rate comes in at 11%. George Soros added Citi to his portfolio last quarter (check out George Soros’ newest picks).

What about the rest of Morgan Stanley’s peers?