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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.