We break down Morgan Stanley’s solid fourth-quarter earnings

Published Wed, Jan 19 202212:50 PM ESTUpdated Wed, Jan 19 20221:31 PM EST

Morgan Stanley (MS) reported better-than-expected FY4Q21 earnings on Wednesday before the opening bell. On the top line, revenues of $14.524 billion (+6.8% YoY) outpaced the $14.494 billion expected by FactSet. On the bottom line, adjusted diluted earnings per share of $2.08 (+8% YoY) exceeded the $1.91 per share consensus. Breaking down that top-line result , noninterest revenues increased 6% YoY to 12.435 billion, while net interest income jumped 12% YoY to $2.089 billion. On the release, CEO James Gorman commented: "2021 was an outstanding year for our Firm. We delivered record net revenues of $60 billion and a ROTCE of 20%, with stand-out results in each of our business segments. Wealth Management grew client assets by nearly $1 trillion to $4.9 trillion this year, with $438 billion in net new assets. Combined with Investment Management, we now have $6.5 trillion in client assets. Our integrated investment bank has continued to gain wallet share. We have a sustainable business model with scale, capital flexibility, momentum and growth." As a reminder, these results do reflect some impact from the prior acquisitions of E-Trade (completed 4Q20). Firmwide Metrics Before digging into the various operating segments, let's take a quick look at some key firmwide metrics. Return on tangible common equity (ROTCE) came in at a very strong 19.8% (20.4% excluding integration-related costs), outpacing the 19% consensus. The bank's expense ratio — a measure of efficiency that is calculated as total noninterest expenses divided by net revenues came in at 66% — was nicely below the 68.8% consensus (lower is better on this front) and an improvement versus the 67% level seen in the year-ago period. Regarding expenses, when asked about management's ability to control them, the team said it benefits from a differentiated business model. Morgan Stanley noted that, because wealth management advisors and most of the investment banking division are compensated based on what they produce, we don't really see an impact from wage inflation. In other words, when the employees make more money, it doesn't really hit margins because this is a result of them bringing in more money for the firm. As for the non-compensation expenses, while these may not be directly tied to new money coming in the way compensation expense is, Morgan Stanley's investments in acquisition integration, technology, resiliency and cybersecurity are what position the bank for growth in the years ahead. Meanwhile, the Common Equity Tier 1 (CET1) capital ratio — a measure of bank capital versus risk-weighted assets and a sign of the bank's ability to endure financial stress — registered at 16.0%, slightly above the 15.4% consensus. Given that the regulatory minimum for this ratio for Morgan Stanley is 13.2%, the firm has plenty of flexibility to investment in the business, support the dividend and continue to buy back shares. In fact, despite issuing 302 million new shares in relation to the E-Trade and Eaton Vance acquisitions, absolute share count actually decreased from 1.81 billion in the end of 2020 to 1.772 billion as of the end of 2021. Lastly, the bank's tangible book value per share (TBVPS) — a measure of intrinsic liquidation value that removes intangibles such as goodwill (think of it as the value of the Morgan Stanley brand) — came in at $40.91, down from $41.95 in the year-ago period. However, that's slightly ahead of expectations of $40.66 per share. Segment Results Starting with Institutional Securities, net revenues of $6.669 billion (-4.3% YoY) came in below the $6.712 billion consensus. Making up that number was investment banking revenues $2.434 billion (+5.7% YoY), equity revenues of $2.857 billion (+12.7% YoY), fixed income revenues of $1.228 billion (-31.4% YoY) and other revenues of $150 million (-56.4% YoY). Within investment banking, advisory revenues advanced 29.5% YoY "driven by higher completed M & A transactions," equity underwriting revenues fell 14.7% YoY "due to declines in follow-on offerings and blocks, partially offset by higher revenues from private placements." Fixed income underwriting revenues advanced 7.4% YoY "driven by higher securitized products and noninvestment grade issuances." On the equity front, declines in cash equities and derivatives were more than offset by higher client balances that resulted in higher prime brokerage revenues as well as a $225 million mark-to-market gain on a strategic investment. Fixed income was hampered by "a challenging trading environment in rates and lower volumes and tighter bid-offer spreads in credit." As for expenses, total expenses decreased to $3.705 billion (-2.4% YoY) as higher non-compensation (+5.1% YoY) related expenses were more than offset by lower compensation (-13% YoY) related expenses. Jumping over to Wealth Management, revenues of $6.254 billion (+10.26% YoY) edged out the $6.237 billion consensus. On the call, Gorman commented that "the growth we have seen in 2021 has been unprecedented." Driving the segment was a 24.4% YoY advance in asset management revenues — which is a reflection of higher asset levels resulting from market appreciation and "strong positive fee-based flows." Net interest income was also a positive in the segment, increasing 16.4% YoY thanks to "strong growth in bank lending and higher brokerage sweep deposits." On the other hand, transactional revenues were an offset, declining 23.4% YoY, though were "essentially unchanged" when excluding "mark-to-market gains on investments associated with certain employee deferred compensation plans." Additionally, the Wealth Management business added net new assets of $438 billion, bringing total client assets under management (AUMs) to $4.9 trillion (+23% YoY). On the expense front, total expenses increased to $4.826 billion (+4.7% YoY) driven by both higher compensation (+4.2% YoY) and non-compensation (+5.8% YoY) related expenses. The E-Trade acquisition drove the increases in both compensation and non-compensation expenses. Finally, on the Investment Management front, revenues of $1.751 billion (+59% YoY) outpaced the $1.65 billion consensus. Driving the results was an 82.4% YoY increase in asset management. Additionally, AUM came in at a record $1.6 trillion, nearly triple what they were 2014 – when Morgan Stanley had finally recovered from the financial crisis, but before its strategy reset and some restructuring. On the expense front, total expenses increased to $1.243 billion (+37.5% YoY) driven by both higher compensation (+19% YoY) and non-compensation (+63.6% YoY) related expenses. The Eaton Vance acquisition drove the increases in both compensation and non-compensation expenses. Capital Returns On the capital returns front, the firm repurchased 28 million shares in the quarter at an average purchase price of $99.80 per share, resulting in a return of capital to shareholders to the tune of $2.833 billion. Furthermore, the Board of Directors declared a quarterly dividend of $0.70 per share, payable on February 15, 2022 to shareholders of record on January 31, 2022. Looking Ahead Morgan Stanley is already off to a good start for 2022, with Gorman opening the call by commenting: "With the early successes of the E-Trade and Eaton Vance acquisitions and the firm's overall momentum, we entered 2022 ahead of plan." Quantifying that, based on the year-end forward rate curve, management expects to realize an additional ~$500 million of net interest income in Wealth Management ("largely weighted to the back half of the year"). Additionally, the team expects to earn another $200 million from the reversal of fee waivers in the Investment Management business. To help investors better understand the impact of rising rates, while management is calling for it this year, Gorman noted on the call that if the we were to see a 100 bps parallel shift in the rate curve, Morgan Stanley would expect to deliver another $1.3 billion in revenue, most of which trickle fall straight into earnings. Additionally, having achieved/exceeded recent objectives in 2021 on ROTCE (20% in 2021 vs, 14% to 16% target), the efficiency ratio (66% vs 69% to 72% targeted) and Wealth Management's pre-tac margin (27% vs 26% to 30% targeted), the team took some time to provide new near-term and longer-term objectives. On ROTCE, management is upping the ante and now targeting a 20%+ rate of return. Additionally, while the efficiency ratio was already on target, the goal now is to solidify under the 70% level. As for the Wealth Management pre-tax margin, management is now targeting 30%+ over time. Additionally, longer-term, the team is targeting client assets of $10 trillion. Of course, the caveat to all of this is subject to major market moves or changes in the economic, political, and regulatory environment. Should we see these goals achieved and sustained over the long-term, we would not be surprised to see the stock rewarded with some multiple expansion. All in, this was a solid quarter from Morgan Stanley that represents the transformation the bank has gone through in recent years as well as strong expense management. As a result of growing more durable revenue sources and efficiently managing expenses, management has achieved greater sustainable earnings power and will be able to effectively invest in the business (be it via organic initiatives or acquisitions) while returning capital to shareholders. At ~$96 a share (down ~9% over the past week), we believe shares to be presenting a buying opportunity despite the strong report and ahead of what could be as many as four Federal Reserve rate hikes this year. (Jim Cramer's Charitable Trust is long MS . See here for for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. Correction: Morgan Stanley reported earnings on Wednesday before the bell. A previous version misstated the day of the week.

James Gorman, chairman and chief executive officer of Morgan Stanley, speaks during a Bloomberg Television interview in Beijing, China, May 30, 2019.

Giulia Marchi | Bloomberg | Getty Images

Morgan Stanley (MS) reported better-than-expected FY4Q21 earnings on Wednesday before the opening bell. On the top line, revenues of $14.524 billion (+6.8% YoY) outpaced the $14.494 billion expected by FactSet. On the bottom line, adjusted diluted earnings per share of $2.08 (+8% YoY) exceeded the $1.91 per share consensus.