Morgan Stanley (NYSE:MS) may wish that January 19, the day it announces its Q4 results, goes by quickly. There’s a long list of things that have worked against the global investment bank over the last quarter, which is expected to reflect negatively on its income statement. With the latter half of 2011 being plagued with concerns over the impact of European debt crisis that is spreading globally, investment banks such as Morgan Stanley and Goldman Sachs (NYSE:GS) saw an extremely lean period for demand for their services. Moreover, Morgan Stanley will take a $1.8 billion charge this quarter in relation to its settlement with the MBIA. It also doesn’t have the advantage of making gains through the revaluation of its own debt as it did in Q3 2011.
We have a $21 price estimate for Morgan Stanley’s stock and attribute the 23% premium over current market price to the pessimistic outlook for banking stocks in the wake of economic slowdown and deteriorating European debt crisis.
Bad Time To Be An Investment Bank
A depressed global economy resulted in extremely volatile conditions that were hardly conducive to trading activities for the second half of 2011. The slowdown also dried up demand for advisory services with companies across the globe putting off any capital raising or restructuring plans to 2012.
Morgan Stanley was able to report decent Q3 revenues from its Institutional Securities business – which includes its trading and advisory services operations. But a closer look at the bank’s Q3 2011 earnings release reveals that out of the $6.5 billion in revenues generated by this business, $3.4 billion came from “movement in credit spreads and other credit factors on certain long-term and short-term debt.” With credit spreads reversing in Q4 2011, Morgan Stanley will not only end up losing this huge advantage for the quarter, but might also end up with a negative debt revaluation figure.
However, the picture is not be so grim overall, as Morgan Stanley’s strong performance over the first half of 2011 will cushion the full year figures.