How Will Securities Trading Headwinds Affect Morgan Stanley’s Revenues?

by Trefis Team
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Morgan Stanley’s (NYSE: MS) Institutional Securities segment (which includes its investment banking and securities trading operations) has added $2.9 billion over the last two year – representing 53% of the $5.5 billion in total revenues the company added over this period. Notably, it is the bank’s highest contributing segment with a revenue share of 50% over the last 3 years. However, the segment’s revenues are expected to decline $500 million over 2019-2020 due to negative market conditions. Despite these headwinds, we expect the banking giant to add around $400 million over 2019-2020, driven by steady growth in Wealth Management and Investment Management divisions.

Trefis details the key components of Morgan Stanley’s Revenues in an interactive dashboard, along with our forecast for 2019-2020. The Institutional Securities segment is expected to contribute $19.6 billion to Morgan Stanley’s 2019 revenues, making up 49% of the company’s $40.1 billion in revenues for 2019. Although Investment Management’s contribution to total revenues has averaged around 7% over the last 2 years, it is expected to add $500 million to the top line over 2019-2020. You can make changes to our forecast for individual revenue streams in the dashboard to arrive at your own forecast for Morgan Stanley’s Revenues.

What To Expect From Morgan Stanley’s Revenues?

  • Morgan Stanley has added $5.5 billion to its revenue over the last two years, from $34.6 billion in 2016 to $40.1 billion in 2018.
  • Total revenues have increased at an average annual rate of 8% over the last three years, from $34.6 billion in 2016 to $40.1 billion in 2018. However, it is expected to report a marginal decrease in 2019.
  • Thereafter, Morgan Stanley’s revenues are expected to grow 1% and cross $40.5 billion by 2020.
  • We expect the revenues to grow around $400 million over 2019-2020, which would be driven by about $400 million from Wealth Management, $500 million from Investment Management, partially offset by $500 million drop in Institutional Securities.
  • Overall, the bank’s revenues are expected to cross $40.5 billion by 2020.

Details about how trends in Morgan Stanley revenues compare with peers Bank of America, JPMorgan and Goldman Sachs are available in our interactive dashboard.

 

(A) Institutional Securities Revenues are expected to drop 2% in 2019.

  • This segment includes five sub-divisions:
    1. Equity Trading – makes market in and trades equities and equity-related products, structures & derivatives
    2. FICC Trading – makes markets in and trades interest rate products, mortgage-related securities, loan products, currencies, commodities etc.
    3. Equity Underwriting & Debt Origination – offers equity & debt underwriting services, which includes public offerings and private placements.
    4. M&A Advisory – provides advisory services in Mergers & Acquisitions (M&A) and financial restructuring
    5. Principal Investments & Other – includes returns and overrides on corporate & real estate investments made by bank-managed merchant banking funds
  • The segment revenues have grown 17% over the last two years – from $17.2 billion in 2016 to $20.1 billion in 2018.
  • This includes an addition of $1.4 billion to Equity Underwriting & Debt Origination revenues over 2016-2018, mainly driven by a 95% jump in Equity Underwriting revenues led by growth in underwriting volume.
  • We expect the segment revenues to decrease by 2% y-o-y in 2019 to $19.6 billion. This would be caused by a 4% decline in equity underwriting & debt origination revenues coupled with a 6% drop in equities trading.
  • Equity underwriting revenues are expected to decrease 4% from $1.7 billion in 2018 to $1.65 billion in 2019, followed by a 3% y-o-y drop in Debt origination revenues.
  • Equities trading revenues are expected to drop by 6% y-o-y in 2019, mainly driven by a 150 bps decrease in equities trading yield.
  • Further, M&A advisory fees are likely to shrink 5%, from $2.4 billion in 2018 to $2.3 billion in 2019.
  • Thereafter, the segment revenues would likely remain unchanged at $19.6 billion by 2020.
  • Overall, this unexpected decline could be attributed to negative market conditions and lower consumer activity in the current year. 

(B) Although Wealth Management revenues have grown 12% – from $15.3 billion in 2016 to $17.2 billion in 2018, we expect the growth to slow down in coming years.

  • 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.
  • We expect the segment’s annual revenue growth rate to fall to just 1% over 2019-2020 due to negative market conditions and lower consumer activity levels in 2019.
  • Overall, the segment revenues are expected to cross $17.6 billion by 2020 – an increase of $400 million.

Our interactive dashboard details what is driving changes in revenues for Morgan Stanley’s Wealth Management divisions.

 

(C) Investment Management is expected to add $500 million over 2019-2020

  • 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.
  • Investment Management grew 29% over the last 2 years, from $2.1 billion in 2016 to $2.7 billion in 2018. This increase could be attributed to a 22% jump in 2017 driven by a 17% increase in total Assets under Management (AuM).
  • Further, fees as % of Assets under Management have seen positive growth over the last 2 years despite intense competition among the asset management players. We expect it to maintain its current trend over 2019-2020.
  • Assets under Management reduced $19 billion in 2018 due to lower asset valuations in the second half of the year. Moving forward, it is expected to grow 13% from $463 billion in 2018 to $524.9 billion by 2020.
  • Overall, this would enable the segment revenues to touch $3.2 billion by 2020 – an addition of $500 million over 2019-20.

 

Trefis estimates Morgan Stanley’s stock (shows cash and valuation analysis) to have a fair value of $55, which is 5% more than the current market price (Our price estimate takes into account Morgan Stanley’s earnings release for the third quarter).

 

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