Morgan Stanley: Bullish on Record Revenue, High ROTCE

Morgan Stanley (MS) operates as a global financial services company and provides investment banking products and services to its clients and customers, including corporations, governments, financial institutions, and individuals. The bank operates through three segments, including Institutional Securities, Wealth Management, and Investment Management. MS was founded in 1924 and is headquartered in New York.

I am bullish on MS stock. The investment bank reported record annual revenue in 2021, and its dividend yield is very attractive.

Morgan Stanley Q4 and Full-Year 2021 Earnings Results

Q4 2021 was mixed for Morgan Stanley, as EPS GAAP of $2.01 beat by $0.09 but revenue of $14.52 billion was a miss by -$66.4 million. MS stock earnings were better than expected in the past seven out of eight quarters, indicating sustainable strength and momentum.

Lets’ dive into more details about the financial performance, starting with its Q4 2021 highlights.

Net revenues of $14.5 billion for the fourth quarter ended December 31, 2021, were up 6.6% compared with $13.6 billion a year ago, and net income of $3.7 billion, or $2.01 per diluted share was up 8.8% compared with $3.4 billion, or $1.81 per diluted share in Q4 2020.

Institutional Securities reported net revenues of $6.7 billion, representing a decline of 4.3% compared to $7.0 billion a year ago, Investment Banking revenues rose 6% from a year ago, but trading revenues were mixed.

More specifically, Equity net revenues grew 13% from a year ago to $2.86 billion, whereas Fixed Income net revenues declined 31% from a year ago to $1.23 billion. Total expenses declined 2.42% year-over-year, and Wealth Management net revenues increased 10% from a year ago.

Investment Management net revenues surged 59% to $1.8 billion compared with $1.1 billion in Q4 2020.

It should be noted that Morgan Stanley’s 2021 earnings results reflect the completed acquisitions of E*TRADE Financial Corporation and Eaton Vance Corp.

Full-year 2021 financial results were very strong, showing a record net revenue of $59.8 billion, up 23% year-over-year, and net income of $15 billion, up 37%. The full-year ROTCE figure was 19.8%.

Return on tangible equity (ROTCE) measures the rate of return on tangible common equity. Tangible common equity is calculated by subtracting intangible assets, goodwill, and preferred equity from the company’s book value.

The investment bank reported a Common Equity Tier 1 capital standardized ratio of 16.0%. Analyzing business segments performance, Institutional Securities reported a record net revenue of $29.8 billion compared with $26.5 billion a year ago, Investment Banking revenues increased 43%, Equity net revenues were 15% higher, but Fixed Income net revenues declined 15% from a year ago.

Another positive factor was that provision for credit losses decreased from a year ago due to improving macroeconomic environment conditions.

Total expenses rose 8.6%, and Wealth Management reported an increase of net revenues of 27%, whereas Investment Management revenue jumped 67%.

It is also notable that Morgan Stanley repurchased $2.8 billion of its outstanding common stock during Q4 2021.

Morgan Stanley Fundamentals

Banks should benefit from higher net interest income in 2022 as the Fed will implement a tighter monetary policy. The rate increases, however, may provide less opportunity for revenue growth for investment banks such as Morgan Stanley.

The stock dividend yield is close to a one-year high. The dividend yield of approximately 3% is reliable and seems safe.

A main reason of concern is that the investment bank is facing a probe by the SEC about block trades related to the collapse of Archegos Capital Management.

Valuation

MS stock is relatively attractive based on its P/E ratio of 11.8x compared to the U.S. capital markets industry average of ~15x and based on its P/B ratio of 1.7x compared to the industry average of ~26x. On the other hand, the stock is relatively expensive based on its PEG ratio of 3.9x.

Wall Street Take

Morgan Stanley has a Moderate Buy consensus rating based on eight Buys and seven Holds. The average Morgan Stanley price target of $114.42 represents 21.3% upside potential.

Conclusion

A very strong 2021 is bullish for MS stock in 2022. The repurchase of shares along with very strong growth in the Investment Management segment and the attractive dividend are supportive factors. The Fixed Income segment should face a tough year with the rising interest rates expected.

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