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Morgan Stanley's Stock Lags Behind — WSJ

By Michael Wursthorn 

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (January 18, 2020).

Morgan Stanley reported record revenue and profit for 2019 and the stock jumped 6.6% on Thursday, its biggest gain in three years. But for some long-term shareholders, that isn't enough -- the stock still trades at a discount to pre-financial crisis levels.

That is a sign of the scars some banks carry more than a decade after the credit crisis; Morgan Stanley's shares remain 20% below their high from May 2007. But the pain runs even deeper. Morgan Stanley's stock is still down 37% from its peak in 2000.

Compare that with rival JPMorgan Chase & Co., which also reported solid earnings earlier this week and whose shares more than doubled where they were in 2007.

What explains the disconnect? Analysts said the pain of the financial crisis has been harder for Morgan Stanley to shake off due to efforts it undertook to avoid collapse, including raising equity that diluted its shareholders and a massive transformation that still hasn't been fully appreciated by investors.

Morgan Stanley isn't alone. Other big bank stocks that continue to trade below their precrisis levels include Bank of America Corp. and Citigroup Inc., while Goldman Sachs Group Inc. trades at roughly the same level. JPMorgan, meanwhile, escaped the crisis on stronger footing to become the most valuable U.S. bank with its $430 billion market cap.

"Morgan Stanley, Bank of America and Citi had much bigger issues to deal with," said Glenn Schorr, a bank analyst at Evercore ISI. "The digging-out process is going to take them much longer."

Morgan Stanley's biggest hurdle, Mr. Schorr said, was the share dilution the bank undertook in the wake of the financial crisis. Entering the throes of the crisis as the smallest bank by market value of those five, Morgan Stanley took moves to bolster the bank's equity capital by issuing more shares. In 2010, Morgan Stanley had about two billion shares outstanding, nearly double its 2006 total. That steepened the bank's path to an eventual recovery, said Mr. Schorr.

Bank of America ran into a similar problem after it issued large amounts of stock to do things like repay government bailout funds. Shares remain nearly 36% off their highest close back in late 2006.

Banks like Morgan Stanley and Bank of America aren't the same businesses as they were back in the financial crisis. Both lessened their dependency on volatile trading and investment-banking revenue and bought massive wealth-management shops, a steadier line of business that is considered less risky.

That helped both stocks notch significant gains over the past decade, even if shares remain short of their precrisis highs. Morgan Stanley shares have risen 141% since 2010, while Bank of America has gained 189%. Morgan Stanley and Bank of America are worth about $91.3 billion and $312.3 billion, respectively.

Goldman Sachs, meanwhile, has pushed into consumer banking, offering savings accounts and loans to more people, a market dominated by JPMorgan. Still, it remains more dependent on traditional Wall Street business lines like trading and deal making and has been dealing with the fallout for its role in a Malaysian corruption scandal.

Shares have risen 69% over the past decade, and are trading at roughly the same level as they were back in October 2007, giving it a valuation of roughly $88.4 billion.

Citigroup's transformation, on the other hand, has delivered mixed results over the years. Its shares closed at $81 Thursday, far short of the $557 price the stock commanded in late December 2006, when it had a higher market cap than Bank of America, JPMorgan, Morgan Stanley and Goldman. Its value is now $176.8 billion.

Despite the differing approaches, many investors still don't fully appreciate the gains some banks have made, keeping a lid on the sector's gains, said Devin Ryan, an analyst at JMP Securities LLC. The S&P 500's financial sector trades at 13 times its earnings over the next 12 months, while the broader index sits at 18.5 times, according to FactSet.

Part of that has to do with the crisis, as well as on-again, off-again concerns of a possible recession, Mr. Ryan added.

"They're so much better capitalized, more liquid, less leveraged, have more reserves," Mr. Schorr said. "These stocks have come so far and improved so much. But some people still put a discount multiple on them."

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(END) Dow Jones Newswires

January 18, 2020 02:47 ET (07:47 GMT)

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