Morgan Stanley (MS) capped off a disappointing earnings season for big banks with its own dud of a report, which further clouds the outlook for 2015 as the year banks finally turn it around.
A sluggish housing market, thin margins, somnambulant trading activity, settlements, fines and increased legal reserves, as well as other special charges, were the order of the day for big banks this earnings season.
It’s depressingly familiar. All these years after the financial crisis, MS stock and the other big bank stocks are still laboring under many of the same old problems.
True, Morgan Stanley finished the year in much better shape than it started it. Changing the bank’s focus to boring-but-safe wealth management from high-stakes investment banking appears to be paying off. But investment banking still matters greatly to MS, and a shortfall there caused Morgan Stanley to miss Wall Street estimates.
A lack of volatility in some of the most profitable markets — notably bonds — has been hurting revenue across the industry for coming up on a year now, and Morgan Stanley was no exception. Trading revenue plunged 41% from the third quarter and 4% year-over-year — a decline that was typical for big banks this earnings season.
The weakness in trading caused total revenue for MS stock to fall 1% to $7.8 billion vs. the year-ago period. Analysts surveyed by Thomson Reuters were looking for revenue or $8.2 billion, on average. Sequentially from the third quarter, revenue deceased 13%.
Morgan Stanley Profit Misses the Mark
By the time Morgan Stanley got to the bottom line, earnings came in well short of analysts estimate. Morgan Stanley earnings rose to $1 billion, or 47 cents per share, from $95 million, or 2 cents per share, in the period a year earlier. Most of that huge gain was driven by easy comparisons, however, as Morgan Stanley was hit by big legal expenses in last year’s fourth quarter.
On an adjusted basis — which is what analysts look at — earnings came to 39 cents per share, short of the average Street forecast for 48 cents per share of MS stock.
From Wells Fargo (WFC) to Citigroup (C) to Goldman Sachs (GS), the issues battering the big banks for years were once again the story of the most recent quarter.
Banks finally put billions of dollars in settlements and fines from the housing crisis behind them, but that hasn’t stopped regulators from finding other dodgy behavior to pursue. JPMorgan Chase (JPM), for example, now finds itself spending large sums to defend itself against accusations of shenanigans in the foreign exchange market.
Interest rates were expected to rise last year as the Federal Reserve ended it’s bond-buying program, but in actuality they declined. With rates still near historic loans, banks have little room to expand their net interest margins — or the difference between what banks pay for deposits and charge for loans.
That actuality has been a huge drag on profitability for years, and it may very well continue in 2015. The Fed may be telegraphing a short-term rate hike around the middle of the year, but some bond market strategists think the long end of the curve could actually have farther to fall. Low rates and narrow spreads also impede fixed income trading desks’ ability to generate profits.
MS stock is up a mere 3% over the last 52 weeks and down more than 12% for the year-to-date. Although it’s hard to see the bull market charging ahead without the financials participating, that doesn’t mean they have to be market leaders. MS stock, like the wider industry, looks like a hold at best.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
