Morgan Stanley’s stock (NYSE: MS) has lost 2% YTD, outperforming the S&P500 over the same period (down 8%). However, it still has an upside potential of 21% to its fair value of $116 – Trefis’ estimate for Morgan Stanley’s valuation. The bank posted mixed fourth-quarter results, with earnings topping estimates and revenues falling short. It reported total revenues of $14.5 billion – up 7% y-o-y. This could be attributed to a 59% y-o-y jump in investment management and a 10% increase in wealth management businesses, partially offset by a 4% drop in the institutional securities unit. The investment management business benefited from the higher Assets under Management (AuM) – segment AuM increased 100% y-o-y to $1.56 trillion. Similarly, the wealth management business grew on the back of higher AuM and an increase in the outstanding loan balance. On the flip side, the institutional securities’ revenues fell in the quarter due to a 31% drop in the FICC (fixed income, currency, & commodity) trading revenues. Overall, the bank’s adjusted net income increased 10% y-o-y to $3.6 billion in Q4.
The company’s revenues of $59.8 billion in FY2021 were 23% more than the previous year. It was driven by a 67% jump in the investment management business, followed by a 27% rise in wealth management, and a 13% growth in the institutional securities unit. The unusually high growth in investment management was driven by an increase in AuM, which was mostly due to the acquisition of Eaton Vance and partly due to organic growth. On a similar note, the wealth management business reported a 27% y-o-y increase in the asset management fees due to a 23% y-o-y rise in total client assets to $4.93 trillion. The institutional securities segment, which generates close to 50% of the total revenues, benefited from a 43% growth in investment banking and a 15% rise in the equity trading revenues, partially offset by a 15% decline in the FICC trading.
Going forward, we expect the Fed to increase the interest rates in FY2022. This will likely help the net interest income. Further, the investment and wealth management divisions are likely to maintain their growth trajectory. That said, the sales & trading and investment banking revenues are expected to normalize in the subsequent quarters with recovery in the economy. Altogether, Morgan Stanley’s revenues are likely to touch $59.4 billion in FY2022 – marginally lower. Additionally, MS’ net income increased 39% y-o-y to $14.6 billion in the year, partly due to higher revenues and partly due to lower expenses as a % of revenues. We expect the net income margin to slightly decrease in 2022, leading to a net income of around $13.9 billion and EPS of $8.05. This coupled with a P/E multiple of just above 14x, will lead to the valuation of $116.
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