Rising Interest Rates Could Help Morgan Stanley

by Trefis Team
Morgan Stanley
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Morgan Stanley (NYSE:MS) plans to cut down on bonuses in order to better align shareholders and employees interests. This also come on the heels of results that have not met expectations set earlier in the year. Morgan Stanley competes with Goldman Sachs (NYSE:GS), JP Morgan (NYSE: JPM), Citigroup (NYSE:C), UBS (NYSE:UBS), Bank of America (NYSE:BAC) and other Wall Street banks, and this move could put pressure on other banks to follow suit.

In looking at the value drivers to Morgan Stanley, we estimate that the Bonds, Currencies & Commodities Trading division accounts for 26% of the $21.54 Trefis price estimate for Morgan Stanley’s stock making it the most valuable segment. One macro factor that could play in MS’s favor is that interest rates are rising slowly, which could help Morgan Stanley’s trading revenues as the year wraps up.

The last couple quarters of earnings have showed muted results compared to expectations. Some clouds are still on the horizon with respect to fiscal state of the US and European economies, which has weighed on risk appetite and made it a difficult environment for the large brokerages. In addition to this, the mortgage and asset backed markets still have a way to go before normalizing. In mortgages, Morgan Stanley has a thorn in its side as MBIA recently announced a lawsuit on its mortgage portfolio.

Despite these headwinds, investment banks and Morgan Stanley in particular are much better off than 12 months ago as the interest rate environment is improving. While rising rates are typically bad for stocks, gradually rising interest rates could help Morgan Stanley improve returns on its trading businesses. An upward sloping yield curve engenders a better and more normal trading environment for interest rate and credit products, which would help Morgan Stanley’s trading business.

This would also flow over to its origination businesses as companies would look to invest once business confidence resumes and might need funding for these purposes. On the consumer banking side, a more normal yield curve would benefit banks like Morgan Stanley due to a better lending environment as banks can borrow short-term rates and lend long-term.

Still the real gain will come from trading gains. If we assume that Morgan Stanley’s yields on trading assets for Bonds, Currencies and Commodities can rise close to pre-recession levels of nearly 3.6%, in the coming years, this would add an upside of nearly 15% to our price estimate for Morgan Stanley’s stock.

Click here to see our full estimates for Morgan Stanley.

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