Trading to Aid Morgan Stanley (MS) Q2 Earnings Amid Virus Woes

Morgan Stanley’s MS second-quarter 2020 results, slated to be announced on Jul 16, are likely to get support from rise in market volatility along with higher client activities, which resulted from the continued uncertainty related to the coronavirus pandemic. Therefore, trading income (one of the major revenue components for the company) is expected to have improved in the quarter, thus, supporting overall performance to some extent.

Similar to the first quarter, the pandemic along with concerns surrounding its impact on the economy weighed on investor sentiments. Thus, investors kept moving toward safe havens like Treasury bonds and other commodities like gold. Therefore, Morgan Stanley’s equity and fixed income markets revenues are expected to have improved in the to-be-reported quarter.

The Zacks Consensus Estimate for equity trading revenues is pegged at $2.16 billion for the second quarter, which suggests a rise of 1.2% from the prior-year quarter’s reported figure. Also, the consensus estimate for fixed income trading revenues of $1.51 billion indicates a year-over-year jump of 33.6%.

The consensus estimate for trading revenues, which is pegged at $3.62 billion, suggests growth of 9.5% from the year-ago figure.

Now, let’s take a look at the other factors that are expected to have influenced Morgan Stanley’s second-quarter performance:

Underwriting fees may offer marginal or no support: Amid near-zero interest rates and the Federal Reserve’s bond purchase program, which commenced on Mar 23, bond issuance volumes were strong in the quarter as companies took this as an opportunity to bolster their balance sheets. Hence, growth in Morgan Stanley’s debt underwriting fees (accounting for more than 50% of total underwriting fees) is expected to have been solid. The consensus estimate for debt underwriting fees is pegged at $455 million, suggesting an increase of 8.3% from the previous-year quarter’s reported figure.

As companies tried to build liquidity to tide over the pandemic-led crisis, there was a substantial rise in follow-up equity issuances in the second quarter, which is expected to have provided considerable support to equity underwriting revenues. However, IPO activities declined in the quarter before picking up a bit in the last weeks of June. Thus, Morgan Stanley’s equity underwriting fees are not expected to have improved significantly in the second quarter. Compared with the prior-year quarter, the company is expected to have witnessed a decline in the same. The Zacks Consensus Estimate for equity underwriting fees of $427 million indicates a year-over-year decline of 21.8%.

The consensus estimate for total underwriting fees of $882 million indicates an 8.7% year-over-year decline.

Advisory income likely to decline: Deal making went for a toss in the to-be-reported quarter as the coronavirus pandemic continued to wreak havoc. The economy and business activities almost came to a grinding halt. Also, global M&As plunged to the lowest level in more than a decade. Thus, Morgan Stanley’s advisory fees are likely to have been adversely impacted.

The consensus estimate for advisory fees is pegged at $335 million, suggesting a decrease of 33.8% from the prior-year quarter’s reported figure.

Net interest income (NII) growth likely to be hurt: During the quarter, commercial and industrial loans witnessed significant growth. However, due to the continued uncertainty related to the virus outbreak, overall loan growth remained soft.

Despite decent growth in loans, Morgan Stanley’s NII is likely to have been hurt because of lower rates. Notably, the Federal Reserve’s move to cut interest rates to near zero in March to support the U.S. economy from the virus-induced slowdown is expected to have hampered net interest yield in the to-be-reported quarter as well.

Expenses may witness a rise: Expense reduction, which has long been the main strategy of the company to remain profitable, is not likely to have been a major support in the quarter. As it continues to make investments in franchise, overall costs are likely to have remained elevated in the to-be-reported quarter.

However, with most of the branches either closed or working with limited staff, overhead expenses are likely to have fallen to an extent.

Here is what our quantitative model predicts:

Our proven model shows that Morgan Stanley does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — to increase 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.

Earnings ESP: The Earnings ESP for Morgan Stanley is -1.67%.

Zacks Rank: The company currently carries a Zacks Rank #3.

The Zacks Consensus Estimate for earnings of Morgan Stanley for the second quarter is pegged at $1.20, which suggests a year-over-year decline of 2.4%. The consensus estimate for sales of $10.78 billion indicates a year-over-year rise of 5.2%.

Morgan Stanley Price and EPS Surprise

Morgan Stanley Price and EPS Surprise

Morgan Stanley price-eps-surprise | Morgan Stanley Quote

Stocks Worth a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Earnings ESP for PNC Financial PNC is +37.70% and it carries a Zacks Rank of 3 at present. The company is slated to report quarterly numbers on Jul 15.

BlackRock, Inc. BLK is scheduled to release earnings figures on Jul 17. The company, which sports a Zacks Rank #1 (Strong Buy) at present, has an Earnings ESP of +5.59%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Earnings ESP for Associated Banc-Corp ASB is +7.31% and the stock carries a Zacks Rank #3, currently. It is scheduled to report quarterly numbers on Jul 23.

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