Morgan Stanley’s Earnings Streak Continued in Q3
We don’t anticipate making a material change to our fair value estimate for the narrow-moat company.
As we expected, Morgan Stanley’s (MS) recent streak of strong revenue and earnings was sustained in the third quarter, and the company achieved an annualized return on tangible equity of about 20%. Net revenue of $14.8 billion was 26% higher than a year ago and basically equal to the second quarter. Record investment banking and growth in asset management revenue and net interest income offset a decline in trading revenue. We don’t anticipate making a material change to our $85 fair value estimate for narrow-moat Morgan Stanley.
Given the continuing recovery in the economy, we believe that investment banking and the company’s net revenue more broadly will remain strong for the foreseeable future. Relatively low interest rates, rising stock market valuations, and capital looking for acquisitions, such as from special purpose acquisition companies that we believe will lead to $200 billion to $400 billion of M&A activity over the next two years, should power investment banking revenue for the next year or so. Total trading revenue of about $4 billion in the quarter is also close to the company’s quarterly average from 2018-20, so is sustainable.
While we expect Morgan Stanley to sustain its relatively high revenue and earnings, its revenue mix will probably start to shift in the next year. Investment banking revenue should eventually reset lower. This quarter’s record $3 billion of investment banking revenue was over 70% higher than the quarterly average from 2018-20. Higher interest rates, which many expect will be coming in the second half of 2022, a choppy stock market, and reduction in SPAC activity could nearly halve investment banking revenue in coming years. However, net interest income that was $2.1 billion in the quarter will increase with interest rates and asset management revenue that was $5.2 billion in the quarter, and about 35% of revenue will fill much of the hole left by investment banking.
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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.