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Morgan Stanley is minimising legal costs

Morgan Stanley will report its first-quarter numbers on Monday 20 April, and the collapse in legal costs is making the bank stand out from the rest of Wall Street.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Canary Wharf
Source: Bloomberg

The US banking sector has been plagued by litigation costs and low revenue from fixed-income trading, and it appears only one of those is a problem for Morgan Stanley now. In the final quarter of 2014, earnings rose by 169% as legal costs slumped – but revenue for the dealing department remained weak.

Morgan Stanley is turning a corner and it is finally shaking off the problems from the credit crisis. The legal bills associated with mortgage backed securities are dwindling, and those costs dropped by 79%.

In the final quarter of 2014 rival Citigroup had nearly all of its profit wiped out by legal costs, and conversely Bank of America revealed an 83% fall in legal costs. The importance of putting the legal costs behind it is the difference between turning a profit that quarter and standing still.

It may be an unpopular move with politicians, but Morgan Stanley is increasing their bonuses for employees. Total compensation rose by 27.5% to $5.1 billion, and that equated to 41% of the firm’s revenue from investment banking being paid out in bonuses. This is in stark comparison with Goldman Sachs which paid out just under 37% in the same time period.

Between rock bottom interest rates, low bond market volatility and a ‘challenging’ year for oil, Morgan Stanley experienced a 13.7% drop in revenue from fixed income, currencies and commodities. Even though other Wall Street houses had been hit worse it still played on traders’ minds.

When Morgan Stanley reveals its first-quarter figures, the consensus is for revenue of $9.18 billion and earnings per share (EPS) of 78 cents. The fourth-quarter numbers missed estimates, and the revenue came in at $7.54 billion and EPS was 39 cents, while the market was expecting $8.14 billion and 49 cents respectively.

The bank will announce its full-year numbers in January 2016, and the market is anticipating revenue of $35.9 billion and EPS of $2.88. These forecasts represent a 6.8% rise in revenue and a 25% increase in EPS.

Investment banks are bullish on Morgan Stanley, and out of the 35 ratings, 13 are buys, 21 are holds, and one is a sell. The average target price is $39.50, which is 6.3% above the current price. Equity analysts are also bullish on Goldman Sachs, and out of the 32 recommendations, ten are buys, 19 are holds, and three are sells. The average target price is $199.30, which is marginally higher than the current price.

Since announcing its first-quarter numbers in January, the number of short positions on Morgan Stanley has dropped by 13.6%. Short interest on the bank is now at its lowest level in one year.

The share price has been rising steadily since the January, and the resistance at $38 is the initial target. If that mark is cleared, December’s high of $39.17 will be the next level to watch, and a move above that will put $40 on the radar.  A drop lower from the level will find support at $36.80 and the next major level of support is $35.

Morgan Stanley is available for extended hours trading.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.  Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.