Morgan Stanley Earnings: Cut This Banking Giant Some Slack

Earnings season is underway, and as usual, Wall Street is kicking off the season with the largest U.S. banks among the first to report. Among the notable names is industry giant Morgan Stanley (NYSE:MS), which just reported its fourth-quarter and full-year 2023 financial results this morning.

Expectations are high, especially with rival banker Goldman Sachs (NYSE:GS) posting an eye-popping 51% year-over-year earnings gain in the fourth quarter. That’s a tough standard for Morgan Stanley to live up to, but perhaps investors shouldn’t obsess over comparisons.

Instead, consider each reporting company as a separate, unique business with its own challenges and growth story. In Morgan Stanley’s case, the challenges are identifiable and hopefully temporary in nature.

A banking metric to watch

Here’s a financial metric you might not be familiar with, but it’s important in assessing the quarterly and annual performance of the major U.S. banks. It’s known as ROTCE, which stands for return on average tangible common shareholders’ equity.

According to Goldman Sachs, ROTCE is “computed by dividing annualized net earnings applicable to common shareholders by average monthly tangible common shareholders’ equity.” It’s a commonly used metric in the financial sector to assess a company’s overall performance, and ideally, a bank should have a ROTCE of 10% or greater.

However, achieving a ROTCE of 10% or higher in 2023 would have been challenging for Morgan Stanley, given the circumstances. As the title of this article suggests, investors should cut the investment bank some slack when evaluating its recent performance.

For one thing, Morgan Stanley is in the midst of a major transition. The company’s CEO for 13 years, James Gorman, stepped down; his replacement, Ted Pick, took over the chief executive role on Jan. 1.

“We begin 2024 with a clear and consistent business strategy and a unified leadership team,” Pick confidently declared.

However, there’s bound to be some loss of efficiency in a company’s operations during a CEO change. Thus, investors should take this challenge into account and understand that the CEO transition is a temporary issue.

Furthermore, Morgan Stanley sustained two sizable one-time charges last year. First, the Federal Deposit Insurance Corporation (FDIC) levied a “special assessment of $286 million pre-tax ($218 million post-tax)” on Morgan Stanley. The company also had to pay a “legal charge related to a specific matter of $249 million pre-tax ($234 million post-tax), which negatively impacted earnings per diluted shares by 28 cents.”

It’s clever of Morgan Stanley to call it a “legal charge related to a specific matter,” as the ugly truth is that this was a legal settlement related to alleged block-trading fraud. However, this is also a temporary financial setback for Morgan Stanley which I hope won’t be repeated.

Getting back to the topic at hand, Morgan Stanley reported an ROTCE of 8.4% for the fourth quarter and better yet, 12.8% for full-year 2023.

As Pick summed it up, “In 2023, the firm reported a solid ROTCE against a mixed market backdrop and a number of headwinds.”

Presumably, the “mixed market backdrop” included high interest rates and the banking crisis of March and April 2023, which caused lesser competitors like First Republic Bank and Silicon Valley Bank to implode.

MS stock: A good value if it falls further

The market’s immediate response today to Morgan Stanley’s fourth-quarter and full-year results was to send MS stock several percentage points lower. However, when you look at the company’s actual results and put them into context, you might determine that there’s a good value here.

For Q4 2023, Morgan Stanley reported $12.9 billion in net revenue, versus $12.7 billion in the year-earlier quarter. For the full year, the company generated net revenue of $54.1 billion in 2023, compared with $53.7 billion in 2022. Hence, Morgan Stanley’s top-line results held steady despite the aforementioned challenges.

Turning to the bottom-line results, Morgan Stanley earned 85 cents per share in Q4 2023, versus $1.26 per share in the year-earlier quarter. I suspect this is what put the market in a bad mood regarding Morgan Stanley. However, bear in mind that this result included the already mentioned one-time charges.

Finally, Morgan Stanley reported full-year 2023 net income of $5.18 per share, versus $6.15 per diluted share in 2022. This shouldn’t be too surprising by now, considering Morgan Stanley’s reduced earnings in the fourth quarter.

I wouldn’t exactly call Morgan Stanley “resilient,” but its results from last year weren’t terrible, given the special circumstances. If the market continues to react negatively and MS stock drops into the $70s, this could represent a good value for enterprising investors.