How will securities trading headwinds affect Morgan Stanley’s earnings?

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Morgan Stanley (NYSE:MS) The institutional securities segment (which includes its investment banking and securities trading operations) added $2.9 billion over the past two years, representing 53% of the $5.5 billion in total revenue that the company has added during this period. This is notably the most contributing segment of the bank with a revenue share of 50% over the last 3 years. However, segment revenues are expected to decrease by $500 million in 2019-20 due to negative market conditions. Despite these headwinds, we expect the banking giant to add around $400 million over 2019-20, driven by steady growth in the Wealth Management and Investment Management divisions.

Trefis details the key components of Morgan Stanley revenue in an interactive dashboard, as well as our forecast for 2019-2020. The Institutional Securities segment is expected to contribute $19.6 billion to Morgan Stanley’s revenue in 2019, or 49% of the company’s $40.1 billion revenue for 2019. Although the investment management contribution revenue has averaged around 7% over the past 2 years, it is expected to add $500 million to revenue in 2019-20. You can make changes to our forecasts for individual revenue streams in the dashboard to arrive at your own forecast for Morgan Stanley revenue.

What to expect Morgan Stanley revenue?

  • Morgan Stanley added $5.5 billion to its revenue over the past two years, growing from $34.6 billion in 2016 to $40.1 billion in 2018.
  • Total revenue grew at an average annual rate of 8% over the past three years, from $34.6 billion in 2016 to $40.1 billion in 2018. However, it is expected that recorded a slight decline in 2019.
  • Thereafter, Morgan Stanley’s revenue is expected to grow 1% and exceed $40.5 billion by 2020.
  • We expect revenue to grow by approximately $400 million in 2019-20, which would be driven by approximately $400 million from Wealth Management, $500 million from Investment Management, partially offset by a decline of $500 million dollars of institutional securities.
  • Overall, the bank’s revenue is expected to exceed $40.5 billion by 2020.

Details on how trends Morgan Stanley’s earnings compare to peers Bank of America, JPMorgan and Goldman Sachs are available in our interactive dashboard.

Institutional securities Revenues are expected to fall 2% in 2019.

  • This segment includes five sub-divisions:
  1. Stock trading – markets and trades equities and equity-related products, structures and derivatives
  2. FICC negotiation – markets and trades interest rate products, mortgage securities, loan products, currencies, commodities, etc.
  3. Subscription of shares and arrangement of debts – offers equity and debt underwriting services, which include public offerings and private placements.
  4. Mergers and Acquisitions Advisory – provides mergers and acquisitions (M&A) and financial restructuring advisory services
  5. Main investments and others – includes returns and waivers on corporate and real estate investments made by merchant banking funds managed by the bank
  • Segment revenue grew 17% over the past two years, from $17.2 billion in 2016 to $20.1 billion in 2018.
  • This includes an addition of $1.4 billion to equity underwriting and debt issuance revenue over the 2016-2018 period, primarily due to a 95% increase in equity underwriting revenue, thanks to the subscription volume growth.
  • We expect segment revenue to decline 2% year-over-year in 2019 to $19.6 billion. This would be caused by a 4% decline in equity underwriting and debt issuance revenue, coupled with a 6% decline in equity trading.
  • Equity underwriting revenue is expected to decline 4% from $1.7 billion in 2018 to $1.65 billion in 2019, followed by a 3% year-over-year decline in debt origination revenue .
  • Equity trading revenue is expected to fall 6% year-on-year in 2019, primarily due to a 150bp decline in equity trading performance.
  • Additionally, M&A advisory fees are expected to decline 5% from $2.4 billion in 2018 to $2.3 billion in 2019.
  • Thereafter, segment revenue would likely remain unchanged at $19.6 billion by 2020.
  • Overall, this unexpected decline could be attributed to negative market conditions and lower consumer activity over the current year.

Although Wealth management revenue grew 12% – from $15.3 billion in 2016 to $17.2 billion in 2018, we expect growth to slow in coming years.

  • It provides financial services (such as brokerage, investment advice, financial planning, insurance, title loans, etc.) to high net worth individuals as well as small and medium enterprises and institutions.
  • We expect the segment’s annual revenue growth rate to fall to just 1% over 2019-20 due to negative market conditions and lower consumer activity levels in 2019.
  • Overall, segment revenue is expected to exceed $17.6 billion by 2020, an increase of $400 million.

Details of our interactive dashboard leading to changes in revenue for Morgan Stanley’s wealth management divisions.

Investment management expected to add $500 million over 2019-20

  • This division offers retail investors a full range of UCITS and alternative investment products, and institutional clients a fully integrated asset management offering.
  • Investment management grew by 29% over the past 2 years, from $2.1 billion in 2016 to $2.7 billion in 2018. This increase could be attributed to a 22% jump in 2017, driven by a 17% increase in total assets under management (AuM).
  • In addition, fees as a % of assets under management have experienced positive growth over the past 2 years despite intense competition between asset management players. We expect it to maintain its current trend over 2019-2020.
  • Assets under management decreased by $19 billion in 2018 due to lower asset valuations in the second half of the year. Going forward, it is expected to grow by 13%, from $463 billion in 2018 to $524.9 billion by 2020.
  • Overall, this would see segment revenue hit $3.2 billion by 2020, an addition of $500 million from 2019-20.

Trefis estimates that Morgan Stanley shares (show cash and valuation analysis) have a fair value of $55, or 5% above the current market price (our price estimate takes into account the earnings release of Morgan Stanley for the third quarter).

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