Strong All-Around Performance Helps Morgan Stanley Post Impressive Q3 Results

Morgan Stanley (NYSE:MS) posted a much better-than-expected performance for the third quarter of the year on Friday, October 17, as the global investment bank continued to capitalize on its revamped business model to churn out decent profits across its operating divisions. ^[1] The highlights of the bank’s performance continue to be the two factors that have carried Morgan Stanley’s results every quarter since Q2 2013 – an industry-leading equities trading desk and a focused wealth management arm. The numbers were also helped by the improved level of activity in global debt and equity capital markets this time around, which allowed the bank to pocket higher underwriting fees compared to a year ago.

Morgan Stanley was the only major U.S. bank to see its share price end the week at higher than the previous week’s closing, as investors cheered Morgan Stanley’s strong Q3 performance by raising its share price by more than 2% over trading on Friday.

We maintain a $38 price estimate for Morgan Stanley’s stock, which is about 15% above the current market price.

See our full analysis of Morgan Stanley

Improved Investment Banking Margins Complement Equities Trading Revenues

Unlike its other major competitors in the U.S., Morgan Stanley’s new business model relies more on equity trading operations than fixed-income operations to generate value, due to a conscious decision by the bank to scale down the latter. This fact is evident from the chart above, which shows that equities trading accounts for almost 30% of the investment bank’s total share value compared to the figure of around 15% for FICC (fixed-income, currencies and commodities) trading.

Since early 2013, Morgan Stanley’s equities trading desk has established itself as the undisputed leader in the global equities trading industry – garnering more revenues from these operations than any other bank worldwide in four of the last five quarters (except for Q4 2013). The bank’s total trading revenues for Q3 2014 were $2.8 billion  -adjusted for debt revaluation gains – with the equities trading desk making $1.8 billion and the fixed-income desk making just under $1 billion. While these revenues are almost identical to what was seen in the previous quarter, they represent a 9% increase compared to the same quarter last year.

Notably, Morgan Stanley’s investment banking operations saw a pre-tax operating margin of 27% for the quarter – making it the best quarter for the bank since it announced sweeping changes to its organizational structure in late 2011.

Wealth Management Continues Profit Run

Over recent years, Morgan Stanley has relied heavily on its wealth management operations to provide a stable source of income in what was once seen as an extremely volatile trading-driven business model. Having achieved the self-imposed 17%-margin target for the business well before the 2014 deadline in Q4 2012, Morgan Stanley has pushed the envelope each quarter since then and managed to achieve a record margin figure of 22% in Q3 2014. This is a sequential improvement of almost two percentage points – something that can be attributed to growing revenues even as the bank kept costs at the same level as in the previous quarter. Thanks to a slight reduction in the number of wealth advisors at the end of the period, the quarter was also the best ever for the division in terms of two key metrics that Morgan Stanley reports: the average annualized revenue per representative and the total client assets per representative.

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1. 3Q2014 Earnings Release, Morgan Stanley Press Releases, Oct 17 2014 [↩]