Rise on record revenues, high ROTCE

Morgan Stanley (MRS) operates as a global financial services company and provides investment banking products and services to its clients and customers, including corporations, governments, financial institutions and individuals. The bank operates through three segments, including Institutional Securities, Wealth Management and Investment Management. MS was founded in 1924 and is based in New York.

I’m bullish on the MS stock. The investment bank posted record annual revenue in 2021 and its dividend yield is very attractive.

Morgan Stanley Fourth Quarter and Full Year 2021 Results

Q4 2021 was mixed for Morgan Stanley as GAAP EPS of $2.01 beat $0.09, but revenue of $14.52 billion was missed by -66.4 million of dollars. MS stock earnings have been better than expected for the past seven out of eight quarters, indicating continued strength and momentum.

Let’s dive into more financial performance details, starting with its Q4 2021 highlights.

Net revenue of $14.5 billion for the fourth quarter ended December 31, 2021 increased 6.6% from $13.6 billion a year ago, and net income of $3.7 billion billion, or $2.01 per diluted share, was up 8.8% from $3.4 billion, or $1.81. per diluted share in Q4 2020.

Institutional Securities reported net revenue of $6.7 billion, down 4.3% from $7.0 billion a year ago, investment banking revenue increased 6 % from a year ago, but trading revenue was mixed.

Specifically, equity net income was up 13% from a year ago to $2.86 billion, while fixed income net income was down 31% from a year ago. has one year to reach $1.23 billion. Total expenses were down 2.42% year over year, and net wealth management revenue was up 10% from a year ago.

Net investment management revenue jumped 59% to $1.8 billion from $1.1 billion in the fourth quarter of 2020.

It should be noted that Morgan Stanley’s results for 2021 reflect the completed acquisitions of E*TRADE Financial Corporation and Eaton Vance Corp.

Full-year 2021 financial results were very strong, posting record net revenue of $59.8 billion, up 23% year-over-year, and net profit of $15 billion dollars, up 37%. The full year ROTCE figure was 19.8%.

Return on Tangible Equity (ROTCE) measures the rate of return on tangible equity. Common tangible equity is calculated by subtracting intangible assets, goodwill, and preferred stock from the book value of the business.

The investment bank reported a standardized Common Equity Tier 1 capital ratio of 16.0%. Analyzing business segment performance, Institutional Securities reported record net revenue of $29.8 billion from $26.5 billion a year ago, investment banking revenue grew increased 43%, equity net income was up 15%, but fixed income net income was down 15% from a year ago.

Another positive factor is that the provision for credit losses has decreased compared to a year ago due to improving conditions in the macroeconomic environment.

Total expenses increased by 8.6% and Wealth Management recorded a net revenue increase of 27%, while Investment Management revenue jumped by 67%.

It should also be noted that Morgan Stanley repurchased $2.8 billion of its outstanding common stock during the fourth quarter of 2021.

Morgan Stanley Fundamentals

Banks should benefit from higher net interest income in 2022 as the Fed implements tighter monetary policy. Rate increases, however, may provide fewer opportunities for revenue growth for investment banks such as Morgan Stanley.

The stock dividend yield is near a one-year high. The dividend yield of around 3% is reliable and looks safe.

One of the main reasons for concern is that the investment bank is facing an SEC investigation into block trades related to the collapse of Archegos Capital Management.

Evaluation

MS stock is relatively attractive based on its P/E ratio of 11.8x compared to the US capital markets sector average of around 15x and based on its P/E ratio of 1.7x compared to the industry average of around 26x. In contrast, the stock is relatively expensive based on its PEG ratio of 3.9x.

Taken from Wall Street

Morgan Stanley has a Moderate Buy consensus rating based on eight buys and seven takes. Morgan Stanley’s average price target of $114.42 represents upside potential of 21.3%.

Conclusion

A very good year 2021 is bullish for MS stock in 2022. The share buyback as well as the very strong growth of the Investment Management segment and the attractive dividend are supporting factors. The Fixed Income segment should experience a difficult year with the expected rise in interest rates.

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