Amid growing uncertainty in global markets, trading activity has seen a slump since last year. Although growing volatility typically results in an increase in trading, the mounting uncertainty among investors has jeopardized markets. Morgan Stanley has been a victim of this slump for quite a while now. Although these concerns have influenced investors’ decisions, sell-side firms have supported the firm on the trading front. Recently, analysts at Macquarie upgraded the stock to Outperform from Neutral, suggesting that the FICC has been a drag on its ROE ratio.
Since the financial crisis, the bank has strived to achieve a balance in its operations and generate stable income from all segments. Although Morgan Stanley (NYSE:MS) posted impressive results in the recent quarterly earnings, the bank saw yet another drop in its returns from fixed income, currencies and commodities (FICC) division. The bank has been under immense pressure from the shareholders as mounting concerns from the trading unit reflect in the stock price of Morgan Stanley. Although the challenges faced by the bank are more of broader market concerns, we believe that Morgan Stanley still needs to convince investors that it is on the right track.
Morgan Stanley posted impressive earnings results in the fourth quarter ending December 31. The bank surpassed analysts’ expectations of 32 cents on earnings per share (EPS), posting 43 cents for the three-month period, while slightly surpassing revenue expectations of $7.7 billion, posting a surprise of 2%. For the full fiscal year ’15 (FY15), Morgan Stanley posted $34.5 billion in revenue and $2.6 in EPS.
Return on equity (ROE) was recorded at 4.9%. The firm targets ROE to be 9-11% by the end of next year. Morgan Stanley’s efficiency ratio currently stands at 74.4, but has seen improvement compared to previous years.
In an interview with Financial Times, Jonathan Pruzan, chief financial officer, Morgan Stanley confirmed that the bank would be cutting down on its assets in the fixed income and commodities division. He confirmed that “this was the first step in a multi-step process.”
David Konrad, Macquarie analyst confirmed that Morgan Stanley’s ROE has been a victim of the company’s poor performing FICC unit. The sell-side firm expects the bank to introduce cuts in the segment in order to improve margins. Maintaining a price target of $33 on Morgan Stanley, Mr. Konrad suggests a valuation of 86% of the tangible book value of the stock. Additionally, the bank is expected to improve its returns on assets and increase its return of capital to shareholders.
Moreover, post 4Q earnings release, analysts at UBS issued a note on Morgan Stanley maintaining a Buy rating on the stock while providing clarity on the FICC business. Morgan Stanley has laid out its plans for restructuring the unit, which UBS expects will free up $5-8 billion of capital. The "Project Streamline" is expected to reduce expenses by $1 billion by next year.
“We faced a market in the second half that had significant dislocation, significant volatility and significant periods of risk aversion,” said Mr. Pruzan to FT, referring to concerns from emerging markets, including China and Greece.
According to the data on Bloomberg, majority of the analysts providing coverage on Morgan Stanley remain bullish on the stock. 16 out of 32 analysts suggest a Buy on the stock, 14 recommend a Hold while only two advocate a Sell. The 12-month mean target price on the stock is $35.
Morgan Stanley stock is down 3% at $24.9 as of 10:40 AM EST.