Morgan Stanley (MS), the best of the financials as we often refer to it, reported solid FY3Q21 earnings on Thursday before the opening bell with revenues of $14,75 billion (+25.9% YoY) outpacing the $13,93B consensus and diluted earnings of $1.98 (+19.3% YoY) topping expectations of $1.69 per share – though we should note that growth rates have been impacted by the prior acquisitions of E*TRADE (completed 4Q20) and Eaton Vance (completed 1Q21), which are housed in the Wealth Management and Investment Management operating segments, respectively.

With this quarter’s results, year-to-date 2021 revenues have now exceeded full year 2019 revenues by nearly 10% thus far.

Shares of Morgan Stanley, was down about 1% at one point today before recovering entirely and turned strongly positive. This indicates strong momentum in the stock.

On the release, CEO James Gorman commented, “The Firm delivered another very strong quarter, with robust revenues and improved efficiency producing an ROTCE of 20%. We had standout performance of our integrated Investment Bank and record net new assets of $135 billion in Wealth Management. Year-to-date, our successful integrations of E*TRADE and Eaton Vance have supported growth of $400 billion in net new client assets across Wealth and Investment Management, bringing our total combined client assets to $6.2 trillion.”

At the firm level, Morgan Stanley reported a return on tangible common equity (ROTCE) of 19.6% (or 20.2% ex-integration expenses), well above the 16.6% consensus. The bank’s expense ratio, a measure of efficiency that is calculated as total non‐interest expenses divided by net revenues came in at 67% (or 66% ex-integration costs), nicely below the 70.7% consensus (lower is better on this front) and a solid improvement versus the 69% level seen in both 3Q20 and 2Q21.

Meanwhile the Common Equity Tier 1 (CET1) capital ratio, a measure of bank capital versus risk-weighted assets and a sign of the bank’s ability to endure financial stress registered at 16.0%, marginally below the 16.3% consensus, however, very much at a healthy level.

Lastly, the bank’s tangible book value per share (TBVPS), a measure of intrinsic liquidation value that removes intangibles such as goodwill (think the value of the Morgan Stanley brand) came in at $40.47, down from $44.81 in the year ago period, however, roughly in line with expectations of $40.71 per share.

Let’s take a look at the various operating segments:

Starting with Institutional Securities, net revenues of $7.495 billion (+22.3% YoY) were well above the $6.042 consensus reflecting “record Investment Banking revenues, led by advisory, continued strong performance in Equity, and solid results in Fixed Income.” This operating segment can be further broken down into Investment Banking, Equity, and Fixed Income. On the investment banking front, net revenue advanced to $2.489 billion (+67% YoY) driven by record advisory revenues of $1.272 billion “driven by higher completed M&A transactions.” Equity underwriting revenues of $1.01 billion benefited “primarily from IPOs and blocks driven by more issuances and activity in a constructive market,” and fixed income underwriting revenues of $567 million were up on “higher non-investment grade loan issuances on the back of increased event financing, partially offset by lower investment grade bond volumes.”

On the equity front, net revenues of $2.876 billion were up due to improved results across the subsegment’s product offerings thanks to “strong client engagement,” particularly in Asia. Lastly on the fixed income front, net revenues of $1.64 billion were down from the year ago period as a result of lower levels of volatility, and tighter bid/ask and credit spreads. On the other side, total expenses came in at $4.498 billion – $2.248 billion compensation, $2.25 billion non-compensation. Account for taxes and segment net income came in at $2.229 billion (+35% YoY).

Moving to Wealth Management, net revenues of $5.935 billion (27.5% YoY – though this is skewed by E*TRADE) came up short versus the $6.167 billion expected, though the annual growth reflected “record asset management revenues and continued growth in bank lending” as the segment added a record $135 billion in net new assets. Making up the segment’s topline were asset management revenues of $3.628 billion, transactional sales of $832 million and net interest income of $1.348 billion. On the other side we saw total expenses of $4.405 billion – $3.159 billion compensation, $1.246 billion non-compensation. Account for taxes and segment net income came in at $1.157 billion (+37% YoY).

Lastly, in Investment Management, net revenues came in at $1.453 billion (+37.6% YoY – though this is skewed by Eaton Vance), short versus the $1.638 billion consensus, with the annual increase representing higher fee-based asset management revenues as Assets Under Management (AUMs) more than doubled to $1.522 billion. Making up the segment results, were $1.47 billion in asset management and related fees that were offset by a $17 million hit to performance-based income and other. On the flip side, total expenses of $1.083 billion – $513 million compensation, $570 million non-compensation. Account for taxes and segment net income came in at $320 million (+42% YoY).

Finally, on the capital return front, the firm repurchased 36 million shares in the quarter at an average purchase price of $99.44 per share, resulting in a return of capital to shareholders to the tune of $3.557 billion. Furthermore, the Board of Directors declared a quarterly dividend of $0.70 per share, payable on November 15, 2021 to shareholders of record on October 29, 2021.

A buying opportunity:

All in, despite some mixed results under the surface in the Wealth and Investment management segments, this was a very solid quarter by Morgan Stanley clearly demonstrating strong progress on the integrations of E*TRADE and Eaton Vance and that the firm overall is firing on all cylinders as the economy recovers. The days of episodic earnings are behind Morgan Stanley and we believe the efforts made in recent years to enhance recurring revenue and more secular growth type business and earnings is helping to support multiple expansion. We remain our price target of 115$ and would be adding to this position on pullbacks below 100$.