Banks Firing on All Cylinders
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Talk about a roll. What a week for banks and financial services companies. Morgan Stanley’s (NYSE: MS) recently announced better than expected earnings for Q1 is yet one more feather in the industry’s cap. The good news comes on the heels of Wells Fargo (NYSE: WFC) kicking things off earlier in the week – something they always like to do – in stellar fashion. Citigroup (NYSE: C) followed that up with reasonably sound numbers. Though not quite as solid as Wells Fargo, Citi also has a deeper hole to climb out of and they appear well on their way to doing so.
Oh, and let’s not forget JPMorgan Chase's (NYSE: JPM) increasingly larger and stronger loan portfolio too. This is starting to sound like a broken record – banks beating what are admittedly lowered expectations. Even Bank of America got into the act, primarily because of better loan quality which equates to less provision requirements and the other, overriding theme for the industry - improved trading activity and capital markets.
It’s this last portion that ties the traditional banks like Wells and BofA to the JPMorgan’s and Morgan Stanley’s of the world. Of course JPMorgan has a solid hold on traditional banking lines as well as opposed to Morgan Stanley’s asset management emphasis, but both relied on improving global capital markets to some extent. The exception to this rule remains Wells Fargo, but then they’ve been the leading investment candidate in the banking industry for months now as they grow core banking services, and have done nothing to change that.
Morgan Stanley’s Results
The $0.71 a share in earnings on revenues of $8.9 billion is nothing to sneeze at of course. Both figures absolutely obliterated analyst expectations. In fact, Morgan Stanley’s quarterly results outdid guesstimates by so much investors would be wise to temper their enthusiasm – at least a little. The average expectations were $0.44 a share on revenues of $7.37 billion. Now don’t get me wrong, destroying estimated financial results is a good thing. But at least some of the difference should be placed firmly on the shoulders of analysts who were clearly lost at sea for some reason. So ignore the fantastic results? No, just recognize it is simply too big a gap to base an investment decision on that alone.
More on Morgan Stanley
There’s also the pending opportunity for Morgan Stanley to up it’s ownership in tried-and-true brokerage Smith Barney next month. The option – should they choose to exercise it - is to increase the stake as high as 65% from its current 51%. With global capital markets being what they are – slowly improving as we’ve seen almost across the board with recent earnings – now may be a good time. There’s even scuttlebutt the firm may make an offer for more of Smith Barney – perhaps even all of it. And the next couple of months will also be interesting for Morgan Stanley for another – less positive – reason.
Moody’s potential three-level credit downgrade is being pooh-poohed by CEO James Gorman and CFO Ruth Porat, which frankly is a bit disconcerting. For a nearly $36 billion institution that kind of increase in borrowing costs would have a significant impact. Though a couple months down the line – Moody’s has suggested they’ll give Morgan Stanley’s credit rating a good look sometime in June – investors would be wise to keep this little diddy on their radar as the countdown continues.
If you’re buying into the notion that the much-anticipated global rebound is in the works – and you should – Morgan Stanley remains a solid investment option even with the recent run-up. Less expensive by all measures than their close brethren Goldman Sachs (NYSE: GS) the only thing muting investors excitement are those guys over at Moody’s. Whether Mr. Gorman and Ms. Porat want to admit it or not, that needs to be a consideration for shareholders and potential investors alike.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article. Motley Fool newsletter services recommend Wells Fargo & Company. The Motley Fool owns shares of Bank of America, Citigroup Inc , JPMorgan Chase & Co., and Wells Fargo & Company, and has the following options: short APR 2012 $21.00 puts on Wells Fargo & Company, short APR 2012 $29.00 calls on Wells Fargo & Company, short OCT 2012 $33.00 puts on Wells Fargo & Company, and short OCT 2012 $36.00 calls on Wells Fargo & Company. timbrugger has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.