Can Morgan Stanley’s Institutional Securities Revenue Cross $20 Billion In 2020?

by Trefis Team
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Morgan Stanley’s (NYSE: MS) Institutional Securities segment will likely add $785 million over the next two years, primarily driven by growth in trading revenues, which is nearly half of the expected incremental revenues of $1.6 billion. It is the highest contributing segment of the bank, with around 49% of revenue share over the last three years. However, the segment’s revenues are expected to be just shy of $20 billion for full-year 2020 – making up 48% of the company’s total figure of $41.8 billion for the year. Trefis details the key components of Morgan Stanley’s Revenues in an interactive dashboard, along with our forecast for the next two years.

 

What To Expect From Morgan Stanley’s Revenues?

  • Although Morgan Stanley’s revenues have increased at an average annual rate of 6% over the last three years – from $37.9 billion in 2017 to $41.4 billion in 2019, we expect the growth rate to reduce to 2% over 2020-2021.
  • Notably, the banking giant has added around $3.5 billion to its revenue over the last two years.
  • We expect the bank to add about $1.6 billion in incremental revenues over the next two years, which would be driven by about $800 million from Institutional Securities, $600 million from Wealth Management, and around $250 million from Investment Management business.
  • Overall, the bank’s revenues are expected to cross $43 billion by 2021.

Our interactive dashboard analysis, ‘Morgan Stanley revenues: How Does Morgan Stanley Make Money?’ provides details about how trends in the company’s revenues compare with peers Citigroup, JPMorgan, and Goldman Sachs.

(A) Institutional Securities would add $785 million in incremental revenues over the next two years

  • This segment includes five sub-divisions:
    • Equity Trading – makes markets 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
  • The segment revenues have grown 8% over the last two years – from $18.5 billion in 2017 to $19.9 billion in 2019.
  • This includes an addition of $618 million to FICC trading revenues over 2017-2019, driven by a 36% jump in FICC trading assets.
  • Further, Principal Investments & Other revenues grew 6x over the last two years – an increase of $507 million – mainly driven by mark-to-market net gains on holdings of publicly traded investments.
  • M&A revenues suffered a decline of 13% – from $2.4 billion in 2018 to $2.1 billion in 2019, due to adverse economic conditions. However, the expected easing of ongoing tensions between the US and China as an effect of the US-China trade deal (phase one signed on 15th January), would support the revenues to grow 11% over 2020-2021.
  • Although equity and debt underwriting revenues suffered in 2019, we expect the unit to grow by 6% and cross $3.8 billion by 2021.
  • FICC trading revenues grew 11% y-o-y in 2019, thanks to the significant jump in the last quarter of the year. Moving forward, we expect the improvement in bond trading yields to drive growth and enable the division to cross $5.8 billion by 2021.
  • While equities trading revenues dropped 10% y-o-y in 2019, mainly driven by 143 bps decrease in equities trading yield, we expect the segment to grow 6% over the next two years primarily due to a 7% increase in equity trading assets.
  • Overall, we expect the segment revenues to increase by 4% and cross $20.7 billion by 2021 – an increase of $785 million.

 

(B) Wealth Management would add $573 million in incremental revenues over 2020-2021

  • This segment 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.
  • Wealth management has grown at an average annual rate of 5% over the last two years, from $16.8 billion in 2017 to $17.7 billion in 2019. It is expected to add $573 million in incremental revenues over the next two years, enabling the segment revenues to cross $18.3 billion by 2021.

Our interactive dashboard – ‘Morgan Stanley revenues: How Does Morgan Stanley Make Money?’ details what is driving changes in revenues for Morgan Stanley’s Wealth Management division.

 

(C) Investment Management is expected to add $267 million over the next two years.

  • 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 46% over the last two years, from $2.6 billion in 2017 to $3.8 billion in 2019. This increase could be attributed to a 37% jump in 2019, caused by a 19% increase in total Assets under Management (AuM).
  • Further, fees as % of Assets under Management have seen positive growth over the last two years, despite intense competition among the asset management players. We expect it to decrease over the next two years slightly.
  • 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 9% from $552 billion in 2019 to $600 billion by 2021.
  • Overall, this would enable the segment revenues to touch $4 billion by 2021 – an addition of $267 million.

Trefis estimates Morgan Stanley’s stock (shows cash and valuation analysis) to have a fair value of $58, which is slightly above the current market price. Our price estimate takes into account the most recent earnings as well as the company’s guidance for the current year.

 

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