Analyst Note| Michael Wong |
Most of the drop in Morgan Stanley’s 2022 revenue and earnings can be attributed to capital markets, and while the economy should be on the edge of a recession in 2023, the year may also establish a bottom for capital markets activity and asset prices for this cycle. For the fourth quarter of 2022, Morgan Stanley reported net income to common shareholders of $2.1 billion, or $1.26 per diluted share, on $12.7 billion of net revenue. Net revenue declined 12% from the previous year and 2% sequentially, leading to 41% and 15% declines in net income, respectively. The majority of the year-over-year revenue decline came from the institutional securities business. As we had said in 2021 and 2022, the institutional securities business had abnormally high investment banking and trading revenue related to the monetary and fiscal stimulus used to combat the economic effects of COVID-19. We had also mentioned that 2021 institutional securities operating margins were much too high at about 40% compared with a recent historical average closer to 30% and that Morgan Stanley and other capital market firms could have declining revenue and compression in operating margins. For the whole year, institutional securities segment net revenue declined $5.4 billion, or 18%, and operating margins compressed to 28% from 40%. We don’t anticipate making a material change to our $91 fair value estimate for narrow-moat Morgan Stanley and assess shares are fairly valued.