Morgan Stanley MS has been continuously making efforts through strategic expansion initiatives to focus on operations that are less capital markets dependent. However, persistently rising expenses and the uncertain performance of the trading business are concerns.

Morgan Stanley’s strategic buyouts, which aim to increase dependence on reliable revenue sources, are commendable. Driven by these efforts, its Wealth Management ("WM") and Investment Management ("IM") segments’ aggregate contribution to net revenues jumped to almost 57% in 2023 from 26% in 2010.

Also, the WM segment’s total client assets witnessed a five-year (2018-2023) CAGR of 17.4%, while the IM segment’s total assets under management recorded a CAGR of 21.5% over the same period. The momentum continued for both metrics in the first half of 2024.

Though the tough operating backdrop might lead to volatility in these metrics in the near term, the trend is expected to improve once the operating environment becomes more favorable. For 2024, we project the WM segment’s total client assets to grow 7.2% and the IM segment’s total AUM balance to rise 1% on a year-over-year basis.

Morgan Stanley’s partnership with Mitsubishi UFJ Financial Group, Inc. MUFG is expected to keep supporting profitability. In July 2023, the companies announced plans to deepen their 15-year alliance by merging certain operations within their Japanese brokerage joint ventures. The new alliance will see combined Japanese equity research, sales and execution services for institutional clients at Mitsubishi UFJ Morgan Stanley Securities and Morgan Stanley MUFG Securities. Also, the equity underwriting business will be rearranged between the two brokerage units. 

Following the 2024 stress test results, MS increased its quarterly dividend by 8.8% to 92.5 cents per share and reauthorized a new multi-year share repurchase program of up to $20 billion, beginning in the third quarter of 2024. The company is expected to be able to continue with efficient capital deployments, given its solid liquidity position and earnings strength.

Likewise, after clearing this year's stress test, JPMorgan JPM announced plans to increase its quarterly dividend by 8.7% to $1.25 per share. JPM also authorized a new share repurchase program of $30 billion, effective Jul 1, 2024. 

However, Morgan Stanley has witnessed a continuous rise in expenses. Though expenses declined in 2022, it saw a three-year (2018-2023) CAGR of 7.7%. The uptrend continued in the first half of 2024. Expenses are expected to remain elevated on the steady increase in revenues (leading to higher compensation costs) and inflation, as well as the company’s investments in franchise and inorganic growth efforts. Our estimates for total non-interest expenses suggest a rise of 3.5% this year.

The performance of Morgan Stanley's Institutional Securities ("IS") segment, constituting the trading and investment banking businesses, depends on the performance of the capital markets. The future performance of the segment remains uncertain as the current global economic and geopolitical environment continues to be influenced by elevated inflation, higher rates, worsening macroeconomic outlook and volatility across the global financial markets.

Though Morgan Stanley sees signs of rebound in M&A and underwriting pipelines, normalization of the trading business is likely to offset this to some extent. We expect the segment’s revenues to rise just 17.1% in 2024 and not reach the levels of 2021 anytime soon.

Currently, shares of this Zacks Rank #3 (Hold) company has lost 6.1% compared with 6.5% decline for the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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