Morgan Stanley (NYSE:MS) handsomely beat analyst estimates for its Q1 2012 revenue figures, but ended up with a small loss for the quarter due to a $2 billion Debt Valuation Adjustment (DVA) charge.  Excluding this one-time accounting charge, the global investment bank generated a respectable $1.3 billion net income on nearly $9 billion in revenues for the quarter. The near-33% revenue growth (excluding DVA) compared to the previous quarter can be attributed primarily to its Institutional Securities business which consists of its sales & trading operations. Bank of America (NYSE:BAC) also reported strong Q1 earnings on the back of improved trading figures.
We have updated our price estimate for Morgan Stanley’s stock from under $22 to $23 to factor in the marked improvement in its trading operation figures and other factors.
The Bank’s Trading Calls Have Been Good
The weak performance by Morgan Stanley’s investment banking operations over the latter half of 2011, due to extreme market volatility, brought revenue figures down for the bank in Q3 and Q4. The modest recovery in the capital markets – particularly the debt markets – has done a lot of good for the bank this time around, as it has been able to capitalize on that improvement.
The Fixed-Income, Currencies & Commodities (FICC) trading business contributed to well over a quarter of Morgan Stanley’s total revenues (excluding DVA) for Q1 2012, adding $2.6 billion to the top-line. This is about 34% more than the number a year ago.
Asset Management Business Only Getting Warmed Up
Morgan Stanley’s asset management arm generated revenues of $533 million for the quarter, for a pre-tax profit of $128 million. While these revenues are 14% lower than the figure for Q1 2011, the reduction in expenses helped keep pre-tax income at about the same level. Notably, the firm’s assets under management have consistently improved over the past year, increasing from $250 million at the end of Q1 2011 to $260 million at the end of 2011, before growing to $276 million at the end of Q1 2012.Notes: