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Normalized Trading to Aid Morgan Stanley's (MS) Q2 Earnings

Morgan Stanley’s MS second-quarter 2018 results, slated on Wednesday, Jul 18, are likely to get support from normalized trading levels. Thus, trading income, one of the major revenue components, is expected to have a positive impact on the company’s earnings.

Unlike the first quarter when higher inflation expectation, tightening of monetary policy by the Fed, impending U.S.-China trade war and a sharp sell-off in the tech sector incited volatility, developments like further escalation in the trade war and some other geo-political tensions in the second quarter were not enough to lead to substantial rise in client activity.

Also, similar to the prior quarters, equity trading revenues are expected to render support to the total trading revenues this time as well compared with fixed income trading revenues, as Morgan Stanley had divested fixed income trading operations over the last few years.

The Zacks Consensus Estimate for equity trading revenues of $2.24 billion reflects a rise of 4% from the year-ago quarter. On the other hand, the Zacks Consensus Estimate for fixed income trading revenues of $1.21 billion indicates a decline of 2.5% from the prior-year quarter.

Overall, second-quarter trading revenues are expected to be $3.40 billion, up 6.7% year over year.

Here are the other factors that are expected to influence Morgan Stanley’s second-quarter results:

Advisory fees to show strength: Global M&A activity in terms of deals closed represents a strong second quarter. Thus, this will likely result in an increase in advisory fees. Also, as the company is a one of the leading players in this space, it will likely provide further leverage to attract more business. The Zacks Consensus Estimate for advisory fees is $587 million, up 16.5% year over year.

A modest decline in underwriting fees: Rising interest rates are likely to have slowed down corporates’ involvement in debt issuances. As debt origination fees account for more than 50% of total underwriting fees for Morgan Stanley, this will likely have an adverse impact on overall underwriting fees. The Zacks Consensus Estimate for debt underwriting fees of $491 million reflects a year-over-year fall of 2.6%.

Nonetheless, equity issuances globally are expected to get a boost from IPOs and follow-on offerings in the second quarter. Thus, equity underwriting fees are anticipated to improve marginally. The Zacks Consensus Estimate for equity underwriting fees of $409 million reflects a rise of nearly 1% from the prior-year quarter.

All in all, total underwriting fees are projected to witness a 1% year-over-year decline as the consensus estimate for the to-be-reported quarter is $900 million.

A slight increase in net interest income (NII): Rise in interest rates will likely lead to an increase in interest income. Also, overall loan demand was decent — particularly in the areas of commercial and industrial. So, NII is anticipated to witness a modest improvement.

Lesser scope of cost containment: Expense reduction, which has long been the main method to remain profitable, is not expected to be a major support in the to-be reported quarter. But given the success of Morgan Stanley’s cost-saving efforts and other restructuring initiatives, overall operating expenses are likely to remain manageable. However, as revenues are expected to rise, compensation expenses will likely witness a slight increase.

Here is what our quantitative model predicts:

We cannot conclusively predict an earnings beat for Morgan Stanley this time. This is because the stock does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Morgan Stanley is 0.00%.

Zacks Rank: Morgan Stanley carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need to have a positive ESP to be confident of a positive earnings surprise.

Morgan Stanley Price and EPS Surprise

 

Morgan Stanley Price and EPS Surprise | Morgan Stanley Quote

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Notably, the Zacks Consensus Estimate for earnings of $1.08 cents reflects a 24.1% jump on a year-over-year basis. Also, the consensus estimate for sales of $10 billion indicates 4.8% growth from the prior-year quarter.

Stocks Worth a Look

Here are a few bank stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

Comerica Incorporated CMA is slated to release results on Jul 17. It has an Earnings ESP of +1.80% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KeyCorp KEY has an Earnings ESP of +0.32% and carries a Zacks Rank of 3. The company is slated to release results on Jul 19.

SunTrust Banks, Inc. STI is scheduled to release results on Jul 20. It has an Earnings ESP of +0.21% and carries a Zacks Rank of 2 (Buy).

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Comerica Incorporated (CMA) : Free Stock Analysis Report
 
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