Morgan Stanley's Q4 results show the Club holding is firing on all cylinders, as the stock soars

Published Tue, Jan 17 20231:33 PM ESTUpdated Wed, Mar 8 20232:02 PM EST

Club holding Morgan Stanley (MS) reported better-than-expected fourth-quarter results Tuesday, with shares climbing more than 7.5% on the news — a sign the bank is making good on its promise to diversify its revenue streams through its focus on wealth management. Revenue declined 12% year-over-year, to $12.75 billion, beating analyst's expectations for $12.64 billion in revenue, according to estimates compiled by Refinitiv. Earnings-per-share dropped by 37% annually, to $1.26 a share, exceeding the $1.19 a share forecasted by analysts. The results were weighed down relative to the same period last year due to a difficult operating environment, including macroeconomic headwinds, the company said. Bottom line Morgan Stanley delivered a solid fourth quarter that once again demonstrated management's ongoing efforts to diversify the bank's revenue streams and build out its wealth management operations. Key aspects of that strategy are the acquisitions of brokerage E-Trade and investment management firm Eaton Vance . Those deals — valued at roughly $13 billion and $7 billion, respectively — pushed Morgan Stanley further into the money management world. The E-Trade deal closed in Oct. 2020, while the Eaton Vance transaction closed in March 2021. To that end, Morgan Stanley's return on average tangible common shareholders' equity (ROTCE) managed to come in at nearly 16% for the full year (excluding integration-related expenses for E-Trade and Eaton Vance), compared with about 8% in 2015. Looking ahead, management expects the wealth and investment management units to contribute to an increasingly larger portion of the bank's pre-tax profit. By way of comparison, in 2010, institutional securities accounted for 74% of pre-tax profits and the firm's ROTCE for the year was 10%. Last year, institutional securities comprised just 48% of pre-tax profits, showing the growing wealth management business has allowed for a greater ROTCE, even amid myriad macroeconomic challenges. Overall, we think the firm is firing on all cylinders and in position to continue generating strong shareholder returns, a result of its more resilient fee-based revenue streams and a strong capital position. Still, we are maintaining a 2 rating for the time being, meaning we would wait for a pullback before buying, as we expect broader macroeconomic and geopolitical headwinds to provide a better entry point down the line. At the same time, we're raising our price target to $105 a share from $95 a share, reflecting roughly 14.5-times 2023 earnings estimates — a warranted premium on the firm's historical valuation. Looking ahead Morgan Stanley reiterated its long-term targets of ROTCE of 20% or greater, an efficiency ratio below 70%, a pre-tax profit margin of 30% or greater at the wealth management unit and net wealth-management asset generation of approximately $1 trillion roughly every three years. The bank continues to target client assets of $10 trillion, compared with the $5.5 trillion delivered at the end of 2022. CEO James Gorman on Tuesday indicated that assets of $10 trillion, with a pre-tax profit margin of at least 30%, would result in roughly $15 billion in pre-tax profits just for the bank's wealth-and-asset-management businesses. That's more than the bank's total pre-tax profits for 2022. The bank did not issue a formal share buyback target for 2023. But the board had authorized a multi-year stock buyback program of up to $20 billion, with no expiration date. That got underway in the third quarter of 2022, leaving roughly $15.75 billion left under authorization at the start of this year. Key metrics CET1 capital ratio came in at 15.3% for the fourth quarter, compared with analysts' expectations for 14.5%. This level is 200 basis points above regulatory requirements of 13.3%, providing the bank "enormous flexibility" to both "invest in future growth and deliver robust returns to shareholders," management said Tuesday. ROTCE in the fourth-quarter was 12.6%, compared with a consensus figure of 12.9%. ROTCE was 13.1% excluding integration costs. Expense efficiency ratio was 77%, ahead of the 76% predicted by analysts. The ratio was 76% excluding integration costs. Tangible book value per share (TBVPS) was $40.06, ahead expectations for TBVPS of $39.87 a share. Definitions: CET1 capital ratio is a measure of bank capital versus risk-weighted assets and a sign of a bank's ability to endure financial stress. ROTCE is a measure of annualized earnings applicable to common shareholders as a percentage of average tangible common equity. Expense efficiency ratio is a measure of efficiency that is calculated as total non-interest expenses divided by net revenue. TBVPS is a measure of intrinsic liquidation value that removes intangibles such as goodwill. Segment results Institutional securities net revenue of $4.8 billion for the fourth quarter missed analysts' forecasts of nearly $5.09 billion. Total expenses came in at $3.99 billion. Investment banking revenue : $1.25 billion, down 49% year-on-year. As was the case last quarter, investment banking was hampered by a decline in mergers and acquisitions, while equity underwriting was hurt by lower global equity underwriting volumes and fixed-income underwriting was hit by a difficult macroeconomic environment that led to lower bond and loan issuances. Equity revenue : $2.18 billion, down 24% from last year and behind analysts' estimates for $2.42 billion. The year-over-year decline was driven by a markdown in strategic investments versus a large gain last year and a decline in client balances. Fixed income revenue : $1.42 billion, up 15% from last year but below expectations of $1.7 billion. The increase came on the back of strength in macro- and credit products resulting from increased client engagement that more than offset lower results in commodities. Wealth management net revenue of $6.63 billion for the quarter exceeded Wall Street's expectations of $6.29 billion. Total expenses for the segment came in at $4.76 billion. Asset management revenue : $3.35 billion, down 9.5% year-over-year due to lower asset levels. Transactional revenue : $931 million, down 15% from last year (excluding the impact of gains related to employee-deferred compensation plans), reflecting a decline in client activity resulting from market uncertainty. Net interest income : $2.14 billion, up 52% year-over-year, a result of higher interest rates and an increase in lending activity. Other revenue : $210 million. Notably, the bank added roughly $52 billion in net new assets (NNA) in the fourth quarter, bringing total new assets in 2022 to over $310 billion. Morgan Stanley has generated roughly $1 trillion in NNAs over the past three years. Investment management net revenue of $1.46 billion for the quarter outpaced the $1.29 billion consensus estimate. Total expenses for the segment came in at $1.25 billion. Asset management and related fees : $1.37 billion, down 13.5% annually, a result of lower asset levels due to the decline in equity markets. Performance-based income and other : $90 million, down from $166 million a year ago. Total assets under management : $1.31 trillion, down 16.6% year-on-year. Capital returns Morgan Stanley repurchased 20 million shares in the fourth quarter at an average purchase price of $86.07 per share, resulting in a return of capital to shareholders of $1.7 billion. This brings total shares repurchased in 2022 to 113 million, for a total return of $9.87 billion. Including the stock's roughly 3% dividend yield, total shareholder returns for last year come in at about 9%. Looking ahead, the board authorized a quarterly dividend of nearly 78 cents per share. Note: As management is in the final stages of integrating E-Trade and Eaton Vance, this will be the final quarter in which they provide measures that exclude integration-related expenses from reported results. (Jim Cramer's Charitable Trust is long MS. See here 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. 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