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Investment Overview for Morgan Stanley (NYSE:MS)
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Below are key drivers of Morgan Stanley's value that present opportunities for upside or downside to the current Trefis price estimate for company's stock:
Wquities Trading
- Equities Trading Assets: Morgan Stanley's equities operations are its biggest source of revenue. The bank's equities trading assets portfolio has fluctuated between $60 billion and $80 billion in recent years, with its value at the end of 2012 being $80.3 billion. We expect modest growth in trading assets going forward. However, the bank could be forced to scale back its equities business due to regulations restricting proprietary trading activities. Should this occur, and trading assets decline slightly to $75 billion as opposed to the increase to around $125 billion that we forecast, there could be a downside of nearly 11% to the Trefis price estimate.
- Equities Trading Yield: Morgan Stanley's equities trading yields has been rather erratic over recent years due to the huge DVA-related gains/losses each year. The yield figure for 2012 was 5.4%. We expect yields to improve to around 7.5% going forward, but expect that growth to be capped by more stringent regulations and risk management measures. However if yields remain around current levels over the Trefis forecast period, there could be a downside of about 7% to the Trefis price estimate.
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Morgan Stanley is a global financial services firm that is engaged in four distinct business areas:
- Investment banking (M&A advisory, equity underwriting, debt origination)
- Sales & Trading (bonds, currencies, commodities, equities, derivatives)
- Wealth Management (high net worth individuals)
- Asset Management
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Equities Trading is the most valuable business for Morgan Stanley. The key factors that make it more valuable than other businesses are:
Higher Yields Compared to FICC Trading Business
The average yield for Morgan Stanley's equities business over the period 2005-2012 has been 8.2% - compared to a figure of 2.1% for the FICC business over the same period. As a result, the equities business is a bigger source of value despite being significantly smaller than the FICC business in terms of trading portfolio size.
Higher Yields and Margins Compared to Wealth Management
Morgan Stanley had wealth management assets of nearly $1.8 trillion at the end of 2012, much more than the 80 billion in assets for the equities trading unit. However, Morgan Stanley was able to generate a yield of 5.4% on these trading assets in 2012. In comparison, the company charges an average fee of 0.76% on wealth management assets.
Furthermore, Morgan Stanley reports pre-tax margins of around 27% in its equities business, compared to under 12% for wealth management. These figures are down from 2006-2007 peaks of 37% for equities business, and 17% for the wealth management business. We expect that Morgan Stanley's margins in these businesses will slowly trend back toward these peak levels over the long-run. These higher yields and margins make the equities business more valuable than the wealth management business.
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Increasing Demand for Investment Banking Services in Emerging Markets
With GDP and per capita income of emerging markets such as China and India growing rapidly, there is an increasing demand for capital from companies in these markets to support the growing purchasing power of the people. Also with the integration of these markets with the global economy, there is a shifting trend in these countries from family run businesses to corporations. As a result of these factors, an increasing number of companies in these markets are going public, leading to a growing demand for equity underwriting services. In addition, consolidation across different sectors is driving demand for M&A advisory services.
Volcker Rule to Affect Proprietary Trading Desks of Investment Banks
The Volcker Rule restricts banks from making certain kinds of speculative investments if they are not on behalf of their customers. Morgan Stanley's proprietary trading desks account for a significant percentage of earnings, and the Volcker Rule could affect the bank's trading revenues.
Eventual Economic Recovery Will Stimulate Asset Management industry
As economic conditions eventually improve we expect that investors will become less risk-averse and will also want to recoup losses they may have incurred during the downturn. Accordingly we expect a recovery to stimulate investment in equity and alternative investment products.
Long term trends, including the ongoing shift from state pension dependency to private retirement funding, aging populations in mature markets and growing wealth in emerging economies will also positively impact assets under management.
Trefis Forecast Rationale for Bonds, Currencies & Commodities Trading Assets
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This represents the fair value of trading assets allocated to Morgan Stanley's Fixed Income, Currencies & Commodities (FICC) business. Trading assets include net derivative contracts related to interest rates, credit, foreign exchange and commodities.
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Morgan Stanley's ${forecast} fell from $270 billion in 2006 to $187 billion in 2012.
We expect the bank's trading assets to gradually increase and approach $300 billion by the end of the Trefis forecast period.
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Trefis considered the following factors for its forecast.
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- Market conditions will dictate growth in trading assets
- As market conditions improve and confidence rises we believe trading assets will start to grow at pre-recession levels. Liquidity is a key factor in determining the fair value of trading assets. If liquidity is low in the market it becomes hard to price these assets and they may need to be priced at depressed levels (hurting total fair value). As market conditions recover not only do liquidity and valuations improve but asset inflows should occur as well.
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- Reduction of risk to slow growth in trading assets
- Since the financial crisis several firms have been taking steps to reduce risk by reducing their balance sheets and risk weighted assets in an effort to reduce trading risk. This could impact trading assets going forward.
- Volcker Rule requires scaling back prop trading
- The Volcker Rule will require bank holding companies to cut back proprietary trading activities, which will result in slower asset growth.
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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