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Weak Trading Performance to Mar Morgan Stanley (MS) Q3 Earnings

Reduced volatility and market normalization are expected to have negatively impacted Morgan Stanley's (MS) trading income in third-quarter 2021.

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This story originally appeared on Zacks

Morgan Stanley’s MS third-quarter 2021 results, scheduled to be announced on Oct 14, are not expected to reflect a solid trading performance. Unlike last year and the first few months of 2021, wherein significant market volatility and client activity aided trading revenues, market normalization and relatively reduced volatility are expected to have dampened the overall trading business this time around. Thus, Morgan Stanley’s trading revenues (a major revenue component) are less likely to have offered significant support to its third-quarter 2021 overall performance.



The third quarter began on a positive note. But then, concerns over accelerating coronavirus infections, renewed inflation fears, signs of a slowdown in China, possibilities of rise in corporate tax rates, fading fiscal stimulus, and the Federal Reserve’s unwinding of the bond purchase program soon weighed on investors’ sentiments. Concerns related to the financial fallout of the potential failure of China’s Evergrande property group and debates over the debt ceiling made investors jittery. While these factors resulted in a heightened level of equity market volatility in the last few weeks of the quarter, overall bond trading remained soft. Thus, Morgan Stanley’s equity as well as fixed-income markets revenues are unlikely to have improved much during the quarter under review.



The Zacks Consensus Estimate for equity trading revenues for the third quarter is pegged at $2.45 billion, which suggests a decline of 13.3% from the previous quarter’s reported number. Also, the consensus estimate for fixed-income trading revenues of $1.50 billion indicates a decline of 11.1% sequentially.

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Other Key Factors Likely to Have Influenced Q3 Performance

Underwriting fees: Continuing the momentum, which started in the second half of 2020, the IPO market remained active in the to-be-reported quarter. Also, there was a steady rise in follow-up equity issuances. These are likely to have offered some support to Morgan Stanley’s equity underwriting revenues.



Growth in the company’s debt underwriting fees, which account for more than 50% of its total underwriting fees, is expected to have been muted in the to-be-reported quarter because bond issuance volumes were not very strong.



The consensus estimate for fixed-income underwriting fees is pegged at $394 million, suggesting a drop of 38.4% from the prior quarter’s reported figure. The Zacks Consensus Estimate for equity underwriting fees of $594 million indicates a fall of 44.6% sequentially.



The consensus estimate for total underwriting fees of $988million calls for a quarter-over-quarter fall of 42.3%.



Advisory income: After a remarkable performance over the past few quarters, deal-making continued at a rapid pace in third-quarter 2021. Both deal volume and total deal value witnessed drastic improvement. This was largely driven by the resumption of normal business activities, excess cash levels, companies’ appetite for strengthening scale and market share, and solid economic recovery.



Morgan Stanley’s position as one of the leading players in the space is likely to have provided leverage. While the company’s advisory fee is anticipated to have been positively impacted in the to-be-reported quarter, it is anticipated to have witnessed a decline compared to the previous quarter.



The consensus estimate for advisory fees is pegged at $565 million, suggesting a fall of 14.9% from the previous quarter’s reported number.



Net interest income (NII): The overall loan demand witnessed marginal improvement in the third quarter. The demand for real estate and consumer loans also shot up in the quarter.



Thus, decent loan growth, along with the steepening of the yield curve (the difference between the short and long-term interest rates) during the quarter, is expected to have extended some support to Morgan Stanley’s NII and net interest margin. However, the prevailing low interest-rate environment remained a headwind.



Expenses: Expense reduction, which has long been the main strategy of Morgan Stanley to remain profitable, is unlikely to have been a major support in the September-end quarter. As the company continues to invest in franchise, overall costs are anticipated to have flared up.

What Our Quantitative Model Predicts

According to our proven model, it cannot be conclusively predicted whether Morgan Stanley will be able to beat the Zacks Consensus Estimate this time. This is because it 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 0.00%.



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



Notably, the Zacks Consensus Estimate for the company’s third-quarter earnings has moved 6.3% north to $1.70 over the past 30 days. The estimate calls for a 6.9% rise from the year-ago reported number. The consensus estimate for sales is pegged at $13.85 billion, which indicates a year-over-year rise of 18.8%.

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 a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:



The Earnings ESP for Bank of America BAC is +0.69% and the stock carries a Zacks Rank of 3, at present. The company is scheduled to report quarterly numbers on Oct 14.



BankUnited, Inc. BKU is slated to report quarterly results on Oct 21. The company currently has an Earnings ESP of +1.90% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Capital One Financial Corporation COF is slated to report quarterly earnings on Oct 26. The company, which carries a Zacks Rank #2 (Buy) at present, has an Earnings ESP of +11.55%.



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