Morgan Stanley Joins Citi, Bank of America in the Doghouse

Morgan Stanley

Morgan Stanley
Oliver P. Quillia for
Morgan Stanley

shares have had a rough 2012, underperforming those of major competitors by so large a margin that the bank is now lagging even perennial post-crisis losers Citigroup and Bank of America according to certain metrics.

Morgan Stanley shares have risen just 4.69 percent through Tuesday, well behind Citigroup, the next-worst performer among the largest six U.S. banks with gains of more than 19 percent so far in 2012. Bank of America , still the top performer in 2012, despite having lost more than 15 percent in the past month, has seen its shares rise more than 40 percent after a dismal 2011 performance.

Morgan Stanley

Morgan Stanley shares now trade at just 6.5 times estimated 2013 earnings, compared to Citigroup’s 6.68 and Bank of America’s 7.33 multiple, according to data from Bloomberg. Wells Fargo, which commands the highest multiple to 2013 estimates of the big six U.S. banks, is at 8.98.

Morgan Stanley also trades at just 63 percent of tangible book value, versus 62 percent for both Bank of America and Citigroup. Wells Fargo , meanwhile, trades at 1.78 times tangible book value.

One clear problem for Morgan Stanley has been the threat of a downgrade to its credit rating from Moody’s Investors Service. On Feb. 15, 2012, Moody’s placed Morgan Stanley’s A2 long-term ratings on review for a potential three notch downgrade to Baa2.

Bernstein Research analyst Brad Hintz stated in a research note published Tuesday that “the most severe impact” of a credit ratings downgrade would be that it would cause derivatives clients to defect to higher-rated institutions such as Deutsche Bank, JPMorgan Chase, or Goldman Sachs. Hintz states derivatives generate approximately 15 percent of fixed-income net revenue and 20 percent of institutional equities net revenue for Morgan Stanley.

Morgan Stanley “could immediately mitigate the impact of the ratings downgrade by shifting its (over-the-counter) derivatives book into its higher rating bank subsidiary,” according to Hintz, though he adds that derivatives provisions in the 2010 Dodd-Frank legislation “might limit the effectiveness of this action over time.”

BlackRock CEO Larry Fink told The New York Timeslast month that “if Moody’s does indeed downgrade these institutions, we may have a need to move some business around to higher-rated institutions.”

In addition to the downgrade threat, Morgan Stanley’s return on equity has been poor. There are various ways of measuring this, though one that is particularly troubling for Morgan Stanley looks at net income excluding one-time charges. On this basis over the past 12 months, Morgan Stanley has returned negative 0.53 percent, the worst of the big six, according to Bloomberg data. Bank of America, the next worst performer by this metric, has returned 4.7 percent.

These factors may explain why, despite its low valuation, Morgan Stanley is not an analyst favorite. On a Bloomberg proprietary scale of one to five, with five being the best, Wall Street analysts rate Morgan Stanley 3.48, ahead of only Bank of America. JPMorgan, the analyst favorite, has an average rating of 4.65.

Bernstein’s Hintz, nonetheless, has an “outperform” recommendation on Morgan Stanley. Hintz argues the bank is in the midst of transforming its business to become a top retail broker and investment bank that is “less reliant on trading with a lower-risk business model.” Hintz expects the company to achieve this goal by 2014.

—By Dan Freed, Senior Staff Reporter,

Additional News: Morgan Stanley Outlines Downgrade Costs

Additional Views: Hedgies Bet Morgan Stanley ‘First to Go’ in Crisis


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