Morgan Stanley, Bank of America Corp Shares Rise After Earnings

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Morgan Stanley and Bank of America released their fourth quarter earnings results before opening bell. Morgan Stanley posted adjusted earnings of 43 cents per share and revenue of $7.7 billion. Analysts had been expecting earnings of 33 cents per share and $7.6 billion. In last year’s fourth quarter, the firm reported revenue of $7.8 billion.

Bank of America posted earnings of 28 cents per share and revenue of $19.8 billion. Analysts had been expecting earnings of 26 cents per share and revenue of $20 billion. In last year’s fourth quarter, the bank reported earnings of 25 cents per share and $18.73 billion in revenue.

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Morgan Stanley swings to profit

Morgan Stanley's earnings including DVA were 39 cents per share, compared to last year's loss of 91 cents per share. Annualized return on average common equity was 4.4%. Excluding DVA, it was 4.9%. The fourth quarter revenue result included a negative impact from changes in the firm's debt-related credit spreads.

The Institutional Securities unit returned net revenues of $3.5 billion, excluding DVA. Morgan Stanley reported that its Equity division remained strong in sales and trading, while the Investment Banking unit also returned solid results. The Fixed Income and Commodities division saw weakness in trading and sales.

The firm's Wealth Management business recorded $3.8 billion in net revenues with a pretax margin of 20% and fee-based asset flows of $11.4 billion. Net revenues for the Investment Management business amounted to $621 million. Assets under management or super vision for the segment were $406 billion.

The firm said that as of December, its pro forma fully phased-in Common Equity Tier 1 risk-based capital ratio was about 14.1%. while its Supplementary Leverage ratio was approximately 5.8%.

Shares of Morgan Stanley climbed by as much as 3.47% to $26.85 per share in premarket trading this morning.

Bank of America returns solid results

Bank of America's net interest income climbed 2% to $10 billion, coming in roughly in line with the consensus estimate of $9.9 billion. Excluding adjustments, net interest income was $10.5 billion. Global Excess Liquidity Sources climbed to $504 billion, while total deposit balances climbed to $1.2 trillion. Return on average assets was 0.61%, while return on average common equity was 5.1% and return on average tangible common equity was 7.3%.

The Consumer Banking segment returned revenue of $7.8 billion on the back of higher loans and deposits. Bank of America's Global Wealth and Investment Management declined to $4.4 billion as negative impacts from the bank's asset liability allocation mostly offset higher deposits and loans.

The Global Banking unit saw revenue rise $4.4 billion, while the Global Markets segment saw revenue climb to $3.1 billion, excluding DVA. The Legacy Assets and Servicing business saw revenue fall as a result of falling loan balances and a slight decline in noninterest income.

Bank of America said its Common Equity Tier 1 capital was $163 billion, while its fully phased-in Common Equity Tier 1 capital was $154.1 billion.

Analysts React

RBC opines

Reported 4Q15 EPS of $0.28, topping both our $0.26 estimate and the $0.27 Street consensus. Results included the previously announced $600M ($0.03/share) charge related to trust preferred redemptions, the $300M ($0.03/share) U.K. tax charge, and ~$100M (<$0.01/share) of positive marks tied to market-related NII adjustments (FAS-91) partly offset by slight negative net DVA/FVA adjustments.
Upside to our projections came from a combination of modestly lower core expenses, higher loan balances, slightly better sales & trading results, and a flat provision, which more than offset softness in fee revenues.
Core expenses declined 0.4% sequentially to $13.5B (vs. $13.8B modeled), excluding litigation costs of $353M (up from $231M in 3Q15). LAS costs declined to $800M and are on-track to reach $500M by year-end 2016 led by another 10% drop in 60+ day delinquencies to 103K


BAC reported 4Q15 EPS of $0.28, which we peg at $0.31 (excluding legal, gains on debt securities, a TruPS hit, and a UK DTA) vs. our comparable estimate of $0.35. While core NII, provision and expenses came largely in line with street expectations (and modestly below GS), fees came in lighter than expected ($9.7bn vs $10.2bn GS est) across several areas (equities, mortgage banking, underwriting, wealth). While there may be some focus on how BAC will bridge the low 30’s core EPS run-rate this year to high 30’s embedded in consensus next year, we expect a much lower bar given the recent share price underperformance and outsized rate sensitivity.


SG View A noisy quarter with several moving parts, including the trust preferred redemption related costs ($0.03) and UK tax law impact ($0.03). Litigation expenses were once again manageable at $428m ($200m in Q3). Overall, a positive quarter - the key positives include: 1) the uptick in core NII (+4% yoy) largely driven by mix shift toward higher yielding loans. Loans growth was +3% yoy (CRE +20%, US comm’l +14% and non-US comm’l +14%); 2) well managed expenses; C/I ratio 71% (69% adjusted for core revenues), slightly
ahead of 68% consensus. LAS expense was down to a $795m runrate vs $500m target for Q4 16; 3) 9.8% CET 1 ratio (vs 9.7% in Q3); 4) Credit provisions $810m (vs $806m in Q3) although NCOs were 0.51% (0.42% in Q3). Management last quarter flagged an $800- $900m/qtr cost for FY16. “Criticized” loans (i.e. weaker credits) rose to $16.5bn (from $13.6bn in Q3), due primarily to energy sector credits.



Our forward EPS likely down on equity mark-to-market and conservative energy reserve build as we have done for the rest of the group that has reported so far.



Reported EPS of $0.28 adjusts to low-$0.30s ex. a bunch of one-time items (TruPs calls, neg. tax impacts, DVA, FAS 91 adj., sec. gains). Core NII grew 2% Q-Q on a flattish balance sheet, while core fees were a little lighter vs. our est. (brokerage, card, mortgage banking). Core expenses were good, down 1% Q-Q to $12.6B Q-Q. NCOs increased 23% Q-Q ($75mm higher comm'l losses driven by energy) to $1.1B, and reserve release netted to ~$300mm.


4Q15 cont. ops. EPS (ex-DVA) of $0.43 vs. Our/Street of $0.30/$0.33: While a 7% ROE this year (5% in 4Q) was not the plan, we’d note most of the problem has been concentrated in FIC as equities, i-banking and wealth management have performed well (definitely more of the same this quarter). For 4Q, the pain was mostly in FICC (-8% y/y) though the rest of the business was good – equity trading rev +12% y/y, GWM margins at ~21%, firm wide deposits grew 6% q/q and GWM loans +7% q/q. Importantly, MS rolled out new targets that should drive profitability higher including $1bn in cost saves, a 200bps lower comp ratio (to 37%), a 300bps improvement in efficiency ratio in a flat tape, 25% reduction in head count in FIC + ~$50bn in RWA shrinkage from
3Q15 levels, a 23%-25% PT margin for wealth mgmt., $10bn a year in WM loan growth – all driving to a 9%-11% ROE in 2017 (~$3.16 - $3.86/share). Given the low multiple of book & earnings, we think there’s plenty of upside for MS if management is able to execute on the plan and feel that further cost saves & RWA reductions (along with the valuation) should help MS be a pretty defensive name.

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