Investment bank Morgan Stanley (NYSE:MS) is the next big bank to report 4th quarter earnings, Tuesday before the markets open. Some analysts expect a healthy rise in per-share profit, partly as a result of the post-presidential election trading environment.
Known on the street as an old-school traditional investment bank, MS may stand to benefit from the so-called "Trump effect" that may usher in a looser regulatory and tax environment. Also, President-elect Donald Trump's calls for more fiscal stimulus, for example, also has helped steepen the yield curve, which typically bodes well for banks like MS because of the higher spread between borrowing and lending rates.
But those are long-term prospects that may or may not come to fruition this year. The Q4 results are likely to represent the company's bread-and-butter units such as trading in fixed income, currencies and commodities (FICC) products, as well as its wealth management services and products.
In January, Reuters reported that MS has laid off a number of senior investment bankers and cut 15% out of bonuses to others in response to revenue pullbacks in its investment-banking businesses. That came after the Jan. 1 start date of new pay packages that were reconfigured with new incentives aimed at drumming up bigger revenues. All of this appears to be part of MS's much-publicized effort to chop $1 billion from its budgets-a big chunk of which is tied to salaries.
MS spokespeople said more information on compensation and workforce changes are expected to be shared on Tuesday's conference call, according to published reports.
Some analysts also note they will be listening to what, if anything, executives may have to say about their outlooks for business in China. MS reportedly is planning to up its stake later this year to 49% with its joint-venture partners in China, in "a sign of good faith to the Chinese government," and belief that the government "will open up over time and offer opportunities," according to the Wall Street Journal. (Foreign banks with operations in China must have JVs with Chinese brokerages that can advise on mergers and acquisitions, and initial public offerings. However, they don't have licenses to trade securities, according to media reports. The 49% threshold is the highest China allows.)
Analysts reporting to Thomson Reuters are expecting per-share profit to rise 51% to $0.65 from $0.43 a year ago. Revenue is anticipated to reach $8.5 billion, up 7.5% from last year's $7.9 billion. MS has beaten Wall Street's expectations in 13 of the last 15 quarters.
Short-term options traders have priced in a potential share price move of just over 3% in either direction around the earnings release, according to the Market Maker Move indicator on the thinkorswim platform from TD Ameritrade.
Call option activity has been heaviest at the 44-strike, while put activity has concentrated at the 42-strike. The implied volatility sits at the relatively low 23rd percentile. (Please remember past performance is no guarantee of future results.)
Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.
Figure 1: CHARTING FRESH HIGHS. Like other banking stocks, MS shares have enjoyed a post-election rally, rising 28% over the last three months to hit levels not seen since May of 2008. Chart source: thinkorswim by TD Ameritrade. Data source: Standard & Poor's. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Probability analysis results from the Market Maker Move indicator are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an event occurring.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.