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Morgan Stanley: Settlement Winner

Investors were obviously relieved, as a courtroom loss could have led to a flurry of additional lawsuits against the companies.

The Federal Reserve announced on Monday that Morgan Stanley and Goldman Sachs (GS - Get Report) were set to begin making payments to over 220,000 mortgage borrowers with loans serviced by subsidiaries of the two companies. The payments totaling about $247 million are part of the broad mortgage industry foreclosure settlement with regulators. Checks will be mailed out beginning on Friday, for amounts ranging from $300 to more than $125,000.

In an analysis of the proposal by Senators Sherrod Brown (D., Ohio) and David Vitter (R., La.) last Wednesday to " walk away from Basel III" and greatly boost capital requirements for the largest U.S. banks, KBW analyst Frederick Cannon late on Sunday said in a note to clients there was "great variation" in the banks' capital levels by certain measures.

The Terminating Bailouts for Taxpayer Fairness Act would toss out the Basel III agreement -- negotiated by U.S. regulators for several years, with signatories including the U.S., all key European economies, Russia, China, India, Japan and Brazil -- and simply require U.S. "megabanks" with total assets of over $500 billion to raise capital levels to at least 15% of total assets.

Under the Brown-Vitter bill, U.S. banks' assets would no longer be weighted by risk, so the capital requirement for an investment in a junk bond would be the same as the capital requirement for a cash position.

Cannon said in a report to clients that Brown-Vitter had "little chance" of passing, but also showed that even Wells Fargo (WFC), with the highest estimated regulatory capital ratio of 8.27% under Brown-Vitter, would have a very long way to go to comply with the proposed rules.

Morgan Stanley reported an estimated Basel III Tier 1 common equity ratio of 9.80% as of March 31, putting it in compliance with the company's full 8.5% Basel III capital requirement years in advance of January 2019, when new capital regime will be fully phased in, according to the Federal Reserve's proposed rules, under the Dodd-Frank banking reform legislation. The Basel III Tier 1 common equity ratio has risk-weighted assets as the denominator.

Under the proposed Brown-Vitter rules, Morgan Stanley's ratio of Tier 1 common equity to total assets would be just 3.93%.

Morgan Stanley's shares have now returned 17% this year, following a 28% return during 2012. The shares trade for 0.8 times their reported March 31 tangible book value of $27.39, and for 8.8 times the consensus 2014 EPS estimate of $2.53. The consensus 2013 EPS estimate is $2.06.

STI Chart STI data by YCharts

Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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