VALUATION HIGHLIGHTS

1. Wealth Management constitutes 61% of the Trefis price estimate for Morgan Stanley's stock.
2. Institutional Securities (M&A Advisory, Equity Underwriting & Debt Origination, FICC Trading, Equity Trading, Principal Investments & Other) constitute 30% of the Trefis price estimate for Morgan Stanley's stock.

WHAT HAS CHANGED?

Latest Earning

In Q4 2023, Morgan Stanley reported Total Revenues of $12.9 billion, up 1% y-o-y. This could be attributed to a 3% rise in the institutional securities segment.

Impact of coronavirus outbreak

Morgan Stanley's stock suffered in the first quarter of 2020 as states and countries were on lockdown due to the Coronavirus pandemic. However, it has recovered now and has surpassed its pre-Covid peak.In 2020, business investing suffered, with a shift in focus from long-term to near-term survivability. On the same lines, there was a drop in consumer demand as people refrained from discretionary expenditures. It hurt the core banking revenues of all the major banks.However, Morgan Stanley generates a big chunk of its revenues from sales & trading and investment banking businesses. Sales & Trading generated positive growth driven by higher trading volumes. This coupled with higher investment banking revenues due to a jump in underwriting deals, resulted in 16% y-o-y growth for Morgan Stanley in FY 2020. The same trend continued in 2021 as well. However, net revenues decreased 10% y-o-y to $53.7 billion in 2022 due to an 18% drop in revenues for the institutional securities segment followed by a 14% decline for the investment management business. Revenues for the bank nudged slightly higher to $54.1 billion in FY2023.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Morgan Stanley's value that present opportunities for upside or downside to the current Trefis price estimate for the company's stock:

Equity Trading

• 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, before recovering to $136 billion in 2016. The figure fell further to $106 billion in 2018 due to lower equity valuations, before increasing to $128 billion in 2020. The value was around $108 billion in 2021. Going forward, we expect modest growth in trading assets. However, the bank could be forced to scale back its equities business due to additional regulations and weak market conditions. Should this occur, and trading assets decline slightly to under $120 billion by the end of the Trefis forecast period as opposed to increasing to more than $186 billion that we forecast, there could be a downside of nearly 5% 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. The figure fell below 5.9% during 2016-17, before spiking to around 10% in 2022. We expect the yield to decrease to 8% by the end of the Trefis forecast period.

BUSINESS SUMMARY

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

SOURCES OF VALUE

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 2010-16 - making it the single biggest source of revenue for the banking giant. The segment revenues are around $24.4 billion in 2022.

Steady Improvement In Operating Margins

Morgan Stanley's efforts to improve profitability for its wealth management division have seen profit margins climb from under 10% in 2011 to well over 27% in 2022. 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 a pre-tax profit of $6.7 billion in 2022, while the figure for wealth management was $6.6 billion.

KEY TRENDS

Increasing Demand for Investment Banking Services in Emerging Markets

With the 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 accounted for a sizable percentage of earnings before the downturn, and the Volcker Rule put a complete stop to these revenues. Although the Trump administration can potentially dilute the Volcker rule restrictions, the timing and effectiveness of proposed changes remain to be seen.

Steady Economic Growth Will Stimulate Asset & Wealth Management industry

Although the asset valuations have suffered in 2022 due to tough macroeconomic conditions. We expect a recovery in the economy 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.