NEW YORK (TheStreet) -- Morgan Stanley's (MS) "earnings momentum is poised to accelerate," according to Deutsche Bank analyst Matt O'Connor, who late on Thursday upgraded the investment bank's shares to a "buy" rating from a "hold" rating.
Morgan Stanley previously announced plans to purchase its remaining 35% stake in its retail brokerage joint venture with Citigroup (C), and is awaiting Federal Reserve approval to complete the transaction, which could come "any day," according to O'Connor.
Having the full revenue stream from the joint partnership will boost Morgan Stanley's earnings, as will the continued rise in equity prices.
"MS has previously estimated a $400m lift to earnings from buying in the remainder of the stake, greater order flow capture, elimination of certain expenses and a partial benefit of a pickup in deposits," O'Connor wrote. The analyst expects "an additional earnings boost," as $50 billion in deposits move onto Morgan Stanley's balance sheet over time.O'Connor added that "if the market holds at current levels, there's about $0.10 of annual EPS lift to come (with a similar additional EPS lift for each further 5% rise in the markets)."
The analyst also sees "meaningful leverage to rising interest rates," for Morgan Stanley, writing that "a 100bp move in rates would boost annual EPS by about $0.20." The Federal Reserve has kept the short-term federal funds rate in a range of zero to 0.25% since later 2008. Since September, the central bank has been making monthly purchases of $85 billion in long-term securities in an effort to hold long-term rates down. The Federal Open Market Committee has repeatedly said it was likely to leave the federal funds rate in its current range at least until the U.S. unemployment rate moves below 6.5%. But top FOMC and Federal Reserve officials have given conflicting statements recently about the timing of a curtailment of the Fed's bond-buying. The market always anticipates monetary policy changes, and the recent rise in market rates on 10-year U.S Treasury bonds could signal a policy change in the near term. The market rate for 10-year U.S. paper was 2.13% on Thursday, increasing from 1.70% a month earlier.
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