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Will Morgan Stanley’s Downgrade Fallout Continue?

It’s been nearly a month since Moody’s lowered Morgan Stanley’scredit rating to three steps above junk, but one analyst questioned whether the downgrade would continue to weigh on the company’s stock.

During Morgan Stanley’s earnings call that followed its dismal second-quarter report, executives said the indecision surrounding the impending downgrade had weighed on activity levels, but said the situation has improved since the June 21 cut.

“Ultimately, if that was weighing on them now, how confident can we be that it’s not weighing on them going forward?” said Jeff Harte, a principal at Sandler O’Neill, on CNBC’s "Squawk on the Street."

On Thursday, the company reported a sharp drop in its trading-related businesses, which sent its stock lower in trading. The bank missed both earnings and revenue estimates, as fixed-income trading revenue plunged 59 percent and equity trading fell 39 percent.

Despite the miss, Harte still has a “buy” rating and a $22 price target on the stock.

During the call, the company detailed a strategic shift away from higher risk-weighted trading businesses.

“They’re saying the right things about focusing on return and getting out of the higher risk, higher risk-weighted businesses,” Harte said. “But the trouble I have there — and I’m going to do some more work on it — but typically your higher risk-taking businesses are the more profitable business and the more client-demanded business. Sometimes those can be the harder ones to walk away from if you’re actually trying to expand your revenue share.”

While Harte does not see Morgan Stanley being bought out anytime soon by a larger financial institution, he wouldn’t rule it out in the future.

“I wouldn’t be so sure that if we get into a better market, the demand for a franchise like this wouldn’t increase,” he said.

Harte added that he thinks the bank remains one of the top investment banking franchises out there.

“I think if the environment gets better, they’re going to do better and so if we can get any kind of environmental tailwinds it’s going to be a great thing to own the stock here,” he said. “The trouble is, as we’ve seen the last couple years, it’s tough to say exactly when that is going to happen, and I think investors are getting a little tired of trying to play that macro game.”

—By CNBC.com’s Katie Little

Additional News: Big Banks’ Earnings Fizzle—And Outlook Isn’t Much Better

Additional Views: Harte Weighs In on Citigroup Earnings ______________________________

CNBC Data Pages:

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Disclosures:

Jeff Harte does not own shares of Morgan Stanley.

Disclaimer

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Follow Katie Little on Twitter @katie_little.

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