Morgan Stanley (NYSE:MS) is expected to announce its performance figures over the last three months on July 19. Numbers for investment banking leaders like Morgan Stanley and competitors Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) will be impacted by the high volatility in global capital markets resulting from the escalating debt situation in Europe. Particularly, we expect Morgan Stanley’s fixed income business to take a significant hit due to its large exposure to Spain and Italy. Weak demand for advisory & underwriting services this quarter would also reflect in the earnings numbers. And Facebook’s mega-IPO this May has only been a source of pain for the investment bank – both financially and legally.
There is No Beating the Volatility in Capital Markets
Morgan Stanley’s debt trading business contributes to almost 30% of it value, according to our analysis. The importance of this business unit is also made evident by the fact that Fixed-Income, Currencies & Commodities (FICC) trading contributed to well over a quarter of Morgan Stanley’s total revenues (excluding DVA) for Q1 2012.
But, the global economic scenario turned for the worse this quarter with conditions similar to those seen in late 2011 forcing traders to work harder to generate profits. And Morgan Stanley’s pre-hedging exposure of $3.5 billion at the end of Q1 2012 to the worst-hit economies of Spain and Italy will only make things worse.
Considering that Q1 was exceptionally profitable for Morgan Stanley in terms of trading, we would not be surprised if the bank reports lower FICC trading revenues than for last quarter – excluding the impact of revaluation of its own debt. Thankfully, the overall numbers for the debt trading division should see a sizable accounting benefit from an improvement in credit spreads.
Lukewarm Performance for Advisory & Underwriting Businesses Too
Morgan Stanley’s other cash minting businesses – advisory and underwriting – are also expected to end up reporting lower top-line numbers compared to the previous quarter. This decline can largely be blamed on this quarter as it was the slowest since Q1 2009 in terms of global advisory and underwriting activity. ((Thomson Reuters Deals Intelligence Website)) Debt capital raised globally in Q2 was more than 36% lower than that was raised in Q1, whereas equity capital raised was about 16% lower.
Data compiled by Thomson Reuters shows that Morgan Stanley’s imputed debt origination fees fell from $295 million in Q1 to $227 million in Q2 – almost 15% decline. We can expect a similar reduction in the bank’s reported numbers for this business.
We are currently in the process of updating our $23 price estimate for Morgan Stanley’s stock to factor in the effect on its value from its huge exposure in peripheral European nations.