Tuesday 29 July 2014 by FIIG Securities FIIG Securities Legacy

Morgan Stanley 2Q14 results and relative value

Morgan Stanley’s (MS) net revenue for the second quarter of 2014 was USD8.6bn was lower than a strong seasonal 1Q14, but improved over the 2Q13 result of USD8.5bn.

All three divisions (Institutional Securities, Wealth Management and Investment Management) performed well but the stand-out was Wealth Management with a record value of assets under management of USD2 trillion and a pre-tax profit margin of 21%.

MS continues to work through its restructure and the cost cutting measures it has implemented, and this quarter saw a sharp rise in net income to USD1.9bn for the quarter compared to USD980m for 2Q13. 

Other points to note:

  • Assets on the balance sheet of USD827bn (USD833bn Year End 2013)
  • Risk weighted assets USD423bn (USD389bn YE13)
  • Deposits USD118bn (USD112bn YE13)
  • Long term debt USD149bn (USD154bn YE13)
  • Common Equity Tier 1 ratio (estimated under Basel III) 13.8% (12.8% YE13)

The bank continues to strengthen and we have no concerns from a credit perspective. Longer term holders of fixed rate MS bonds should be sitting on healthy profits if they bought them when we first recommended them a few years ago. The question remains of the possibility of further upside which we view as limited given the current low trading margins and yields of the AUD bonds.

The MS bonds due to mature in 2015 have very low yields to maturity of under 3%, while the longer dated fixed rate bonds show higher yields to maturity, but they are still lower than similar rated securities (see Table 1 and Figure 1 below).

Any remaining investors should consider taking profits and switching into bonds such as Genworth and National Wealth subordinated debt, which have similar credit ratings, shorter times to likely maturity at the first call date and higher yields.

Table 1

Source: FIIG Securities
Figure 1

Key terms

Call date

The date prior to maturity on which a callable bond may be redeemed by the issuer. If the issuer determines there is a benefit to refinancing the issue, the bond may be redeemed on the call date, at par, or at a small premium to par depending on the terms of the call option.

Running yield

Running yield uses the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased a bond and held it for a year. It is calculated by dividing the coupon by the market price.

Trading margin

The expected return earned on a floating rate security in addition to that security’s reference rate.

Yield to maturity

The return an investor will receive if they buy a bond and hold the bond to maturity. It is the annualised return based on all coupon payments plus the face value or the market price if it was purchased on a secondary market. Yield to maturity thus includes any gain or loss if the security was purchased at a discount (below face value) or premium (above face value). It refers to the interest or dividends received from a security and is usually expressed annually or semi-annually as a percentage based on the investment’s cost, its current market value or its face value. Bond yields may be quoted either as an absolute rate or as a margin to the interest rate swap rate for the same maturity. It is a useful indicator of value because it allows for direct comparison between different types of securities with various maturities and credit risk. Note that the calculation makes the assumption that all coupon payments can be reinvested at the yield to maturity rate. Also, the yield and coupon are different.