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Stock Analyst Update

Morgan Stanley Reports Record Full-Year Net Revenue

The organic growth for the narrow-moat firm is dependent on market returns.


Narrow-moat Morgan Stanley (MS) reported record full-year net revenue, with organic growth in the next year or two mainly depending on market returns adding to client assets. The company reported net income to common shareholders of $10.5 billion, or $6.46 per diluted share, on $48 billion of net revenue. Net revenue increased 16% from the previous year with broad-based revenue growth across investment banking, trading, and investment management. Return on tangible common equity was 15.2% for the year. We anticipate that our current $56 fair value estimate for Morgan Stanley could increase upward of 10% as we factor in stronger-than-expected growth in client assets.

Given likely modest headwinds in investment banking revenue in 2021, near- to medium-term growth is more dependent on the company’s wealth and investment management businesses. While net revenue growth in 2020 was broad-based, areas of particular strength included equity underwriting, which increased about $1.4 billion (81%); equity trading, which increased $1.7 billion (22%); and fixed-income trading, which increased $3.3 billion (59%). While investment banking executives are optimistic about the near-term sustainability of underwriting and acquisition advisory revenue, the abnormally high trading revenue in 2020 will be tough to grow from. Quarterly fixed-income trading revenue in 2020 was about 67% higher than the 2018 to 2019 quarterly average. Furthermore, fourth-quarter 2020 fixed-income trading revenue was 30% lower than the average of the first three quarters of 2020, showing a significant slowdown. Equity trading revenue remained strong in the fourth quarter, but trading volume in 2020 were likely abnormally high due to high market volatility from COVID-19 and the subsequent strong market recovery. With some reset of institutional securities revenue lower, the wealth and investment management businesses, which are about half of net revenue, will have to fill the hole.

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Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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