Morgan Stanley Banks on Trading Gains

Those gains came come if the yields on trading of bonds, currencies and commodities approach pre-recession levels.
By Trefis ,

NEW YORK (TheStreet) - Morgan Stanley (MS) - Get Report plans to cut down on bonuses in order to better align shareholders and employees interests.

This also comes on the heels of results that have not met expectations set earlier in the year. Morgan Stanley competes with

Goldman Sachs

(GS) - Get Report

,

JP Morgan

(JPM) - Get Report

,

Citigroup

(C) - Get Report

,

UBS

(UBS) - Get Report

,

Bank of America

(BAC) - Get Report

and other Wall Street banks, and this move could put pressure on other banks to follow suit.

In looking at the value drivers to Morgan Stanley, we estimate that the Bonds, Currencies & Commodities Trading division accounts for 26% of the $21.54 Trefis price estimate for Morgan Stanley's stock making it the most valuable segment. One macro factor that could play in MS's favor is that slowly rising interest rates could help Morgan Stanley's trading revenues.

The last couple quarters of earnings have showed muted results compared to expectations. Some clouds are still on the horizon. The fiscal state of the U.S. and European economies has weighed on risk appetite and made it a difficult environment for the large brokerages. In addition, the mortgage and asset backed markets have a way to go before normalizing. In mortgages, Morgan Stanley has a thorn in its side as MBIA recently announced a lawsuit on its mortgage portfolio.

Despite these headwinds, investment banks and Morgan Stanley in particular are much better off than 12 months ago as the interest rate environment improves. While rising rates are typically bad for stocks, gradually rising interest rates could help Morgan Stanley improve returns on its trading businesses.

An upward sloping yield curve engenders a better and more normal trading environment for interest rate and credit products, which would help Morgan Stanley's trading business.

This would also flow over to its origination businesses as companies would look to invest once business confidence resumes and might need funding for these purposes. On the consumer banking side, a more normal yield curve would benefit banks like Morgan Stanley due to a better lending environment that allows banks to borrow at short-term rates and lend long-term.

Still,the real gain will come from trading gains. If we assume that Morgan Stanley's yields on trading assets for Bonds, Currencies and Commodities can rise close to pre-recession levels of nearly 3.6%, in the coming years, this would add an upside of nearly 15% to our price estimate for Morgan Stanley's stock.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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