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Morgan Stanley Hits Record Despite $911M Archegos Loss

We don’t anticipate a material change to our $70 fair value estimate.

Morgan Stanley MS had strong revenue and earnings in the first quarter, despite hundreds of millions of dollars in losses related to Archegos Capital. Morgan Stanley reported net income to common shareholders of $4 billion, or $2.19 per diluted share, on a record $15.7 billion of net revenue. Pre-provision net revenue increased 61% from the previous year and 16% from the previous quarter. While part of the increase from the previous year is due to Morgan Stanley’s acquisition of online brokerage E-Trade that closed in October 2020 and asset manager Eaton Vance that closed in March 2021, most is due to the exceptional performance in the company’s institutional securities business. The company was able to report these strong results and had an annualized return on tangible equity of 21.1%, despite booking $911 million of losses related to Archegos Capital. We don’t anticipate making a material change to our $70 fair value estimate for narrow-moat Morgan Stanley and assess shares as fairly valued.

Morgan Stanley’s abnormally high net revenue should normalize lower, but it may take several quarters. Investment banking revenue of $2.8 billion in the first quarter was 80% higher, and institutional securities trading revenue was about 70% higher than the 2018-19 quarterly average. With a strong stock market, low interest rates, and expectations of economic growth, the institutional securities business is practically firing on all cylinders. Strong asset prices have bolstered the company’s investment management businesses, while daily average trades in its self-directed brokerage business increased to 1.6 million in the quarter from 1.1 million in the fourth quarter. A more normal level of business activity could decrease net revenue 10%-15% from the first quarter. All that said, we remain positive on the company’s long-run prospects.

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