Morgan Stanley’s Outlook For 2019 Is Weak Despite Expected Gains In Wealth Management

by Trefis Team
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Trefis
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Morgan Stanley
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Per Trefis, Morgan Stanley (NYSE: MS) stock is worth $53, which is 15% higher than the current market price. Our price estimate is based on a P/E multiple of 10.8x and an EPS estimate of $4.92 for FY 2019. We have summarized our full-year expectations for Morgan Stanley in our interactive dashboard How Did Morgan Stanley Fare In Q1 2019, And What Can We Expect In 2019? You can modify any of our key drivers to gauge the impact of changes on its valuation. In addition, you will find more Trefis data for Financial Services companies here.

A Quick Look At Morgan Stanley’s Revenue Sources

Morgan Stanley reported $40.1 billion in Total Revenues in FY 2018. This included 3 revenue streams.

  • Institutional Securities: $20.1 billion in FY 2018 (50% of Total Revenues) – It consists of five sub-divisions:
    • Equity Trading – makes market in and trades equities and equity-related products, structures & derivatives
    • FICC Trading – makes markets in and trades interest rate products, mortgage-related securities, loan products, currencies, commodities etc.
    • Equity Underwriting & Debt Origination – offers equity & debt underwriting services, which includes public offerings and private placements.
    • M&A Advisory – provides advisory services in Mergers & Acquisitions (M&A) and financial restructuring
    • Principal Investments & Other – includes returns and overrides on corporate & real estate investments made by bank-managed merchant banking funds
  • Wealth Management: $17.2 billion in FY 2018 (43% of Total Revenues) – It provides financial services (like brokerage, investment advisory, financial planning, insurance, securities-based loans etc.) to wealthy individuals as well as small- to medium-sized businesses and institutions.
  • Investment Management: $2.8 billion in FY 2018 (7% of Total Revenues) – This division provides retail investors with a full range of mutual fund and alternative investment products, and institutional clients with a fully-integrated asset management offering.

Key Revenue Drivers

  • Loans to Wealth Management Clients: In Q1 2019, Net Interest Income for Wealth Management increased 12% y-o-y driven by growth in loans and an improvement in the interest environment. Loans to Wealth Management Clients have seen steady growth over the years (CAGR 2015-2018: 9.1%) and are likely to follow the same trend in subsequent quarters. We expect this loan portfolio to grow 5% in 2019.
  • Equity trading portfolio: This is the main revenue driver for Morgan Stanley’s Institutional Securities division. In Q1 2019, Equity Trading revenues fell by 21% y-o-y due to lower activity levels in the industry, and the trend is likely to remain over subsequent quarters. However, Morgan Stanley’s Equity Trading Portfolio size should recover from the lows seen in late 2018 and are likely to increase 16% in 2019. This should partially offset the impact of an expected decline in Equity Trading Yield on Morgan Stanley’s top line.

Morgan Stanley’s Outlook For Full Year 2019

  • Morgan Stanley is expected to report $39.75 billion in Total Revenues for 2019, which is slightly below the figure for 2018.
  • Institutional Securities revenues are expected to decrease 4% due to a decline in Equity Underwriting & Debt Origination, and Equity Trading revenues. However, expected growth of 2% in Wealth Management revenues should help.
  • Although Investment Management is expected to grow 4% over the year driven by an 8% increase in Assets Under Management (AUM), its overall impact on Morgan Stanley’s Total Revenues is not significant.
  • Total Expenses would marginally decrease to $50.3 billion due to lower expected Compensation Costs. But with revenues shrinking more than expenses, Net Income will decrease roughly 2% in 2019 compared to 2018.
  • Morgan Stanley is expected to repurchases billions of dollars’ worth of shares over the year. This should help its EPS figure reach $4.92 for FY 2019.
  • EPS of $4.92 coupled with our forward P/E multiple of 10.8x represents a price estimate of $53 – representing a potential upside of 15% for the bank’s stock.

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