Morgan stanley (NYSE: MS) reported another quarter of solid growth earlier this month, driven by exceptional performance across all of its segments. The company has been successful in diversifying its revenue streams to be able to perform in all kinds of markets, and it continues to benefit from its E * Trade and Eaton Vance acquisitions which closed in October 2020 and March 2021, respectively.
Morgan Stanley crushed it from an investment banking perspective, and the company expects this segment to strengthen in the fourth quarter and into 2022. According to Alan Felder, chief executive of UBSOneBank, investors should expect to see strong M&A activity continue in 2022, as interest rates remain low and public and private companies have a large amount of liquidity available for future investment opportunities. ‘investment.
Let’s take a look at what else this month’s earnings report tells us about Morgan Stanley going forward.
Strong profits at all levels
In the third quarter, Morgan Stanley reported revenue of $ 14.8 billion, up 26.5% from the same quarter last year, while net income of $ 3.7 billion dollars was up 37%.
Morgan Stanley beat analysts’ estimates, posting revenue 5.9% above estimate and earnings per share (EPS) 20.7% above estimate. Growth in assets led to growth in fee-based income, and a strong backdrop for the investment banking business led to record revenues, driven by mergers and acquisitions (M&A) and underwriting income. initial public offering (IPO).
Solid growth was seen across all segments of Morgan Stanley. Institutional securities income of $ 7.5 billion was up 22.3% from a year ago, driven by investment banking income, up 67% from the same quarter of l ‘last year. This strong performance reflects strong demand for its equity underwriting and M&A advisory services, which hit a record high in 2021.
What is management expecting in 2022?
One point CEO James Gorman discussed during Morgan Stanley’s earnings call was how volatility might increase in the markets next year. Specifically, he pointed to the decline in Federal Reserve activity and how the Fed’s dot chart suggests that interest rate hikes will also occur next year. Overall, he says “it’s good to be vigilant right now” and that there is “nothing to suggest there are problems” but “over the next 18 months we will see more as the Fed starts to move. ”
One of the reasons Gorman is watching interest rates closely is that it could ultimately affect M&A activity and slow the growth of investment banking income. Although a gradual increase in interest rates may not have too large an impact on the conclusion of agreements, faster interest rate increases could lead to greater volatility in the markets due to rate shocks. interest that might discourage deal-making activities.
Take action to give more stability to future profits
While mergers and acquisitions are expected to remain robust, faster-than-expected interest rate hikes could impact Morgan Stanley’s investment banking division. This is one of the main reasons the company has spent $ 20 billion to acquire asset manager Eaton Vance and electronic trading platform E * Trade over the past two years. According to Gorman, each transaction “offers more balance to our business model. It’s more wealth management income, it’s more stability, it’s less volatile than the main activity of the markets.”
Acquisitions are already driving Morgan Stanley growth across all segments, with third-quarter wealth management revenues increasing 27.5% to $ 5.9 billion year-on-year, while investment management revenues grew. increased 37.6% to $ 1.5 billion. As a result of these two acquisitions, client assets increased by $ 400 billion this year, bringing total client assets under management to $ 6,200 billion.
Should Morgan Stanley take a shock to investment banking income in 2022 or beyond, the company is well positioned to capture income from its other sources. Increased volatility could increase trading activity on its E * Trade platform, and higher rates could result in increased interest income for the company. This stability in Morgan Stanley’s future earnings is one of the reasons I continue to be bullish on this value stock, which trades with a price-to-earnings (P / E) ratio of 13.2 while the competitor Charles Schwab is trading at a P / E ratio of 31.6.
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