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Investment Overview for Morgan Stanley (NYSE:MS)
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:
- Equity Trading Assets: Morgan Stanley's equity trading operations are an important source of revenue. The bank's portfolio of equity trading assets has fluctuated between $60 billion and $80 billion over 2008-12, before growing to $133 billion in 2014. The figure fell to $123 billion in 2015 due to a decline in equity market valuation over the second half of the year. Going forward, we expect modest growth in trading assets. However, the bank could be forced to scale back its equities business due to regulations restricting proprietary trading activities and weak market conditions. Should this occur, and trading assets decline slightly to under $100 billion by the end of the Trefis forecast period as opposed to increasing to more than $150 billion that we forecast, there could be a downside of nearly 10% to the Trefis price estimate.
- Equity Trading Yield: Morgan Stanley's equity trading yields have hovered around 5.4% over 2012-14, before jumping to 6.8% in 2015 thanks to a strong performance over the first half of the year even as the portfolio shrunk in value by the end of the year. We expect yields to improve to around 5.8% going forward, but expect that growth to be capped by more stringent regulations and risk management measures. However if yields improve to the average level of 7.2% seen in 2005-07 over the Trefis forecast period, then there could be an upside of about 6% to the Trefis price estimate.
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
Wealth Management is the most valuable business for Morgan Stanley. The key factors that make it more valuable than other businesses are:
Higher Revenues Compared to Any Other Business
As Morgan Stanley acquired Smith Barney from Citigroup in a phased manner and focused on growing its presence in the wealth management industry, the division witnessed a steady improvement in revenues over 2010-15 - making it the single biggest source of revenue for the banking giant. In fact, Morgan Stanley's wealth management operations now generate more revenues than its equity and FICC trading desks combined.
Steady Improvement In Operating Margins
Morgan Stanley's efforts to improve profitability for its wealth management division has seen profit margins climb from under 10% in 2011 to 22% in 2015. Given the sheer size of revenues generated by the division, this translates into a significant (and stable) source of profits for Morgan Stanley. To put things in perspective, Morgan Stanley's Institutional Securities division (investment banking and sales & trading combined) reported an average pre-tax profit of $2.8 billion over 2013-15, while the figure for wealth management was almost $3 billion for the same period.
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 will affect the bank's trading revenues.
Eventual Economic Recovery Will Stimulate Asset & Wealth 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 Debt Origination RevenueBack to Company Overview
How 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.
See more on: DCF Methodology
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