Morgan Stanley: Financial Loser

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the loser among the largest U.S. banks on Monday, with shares sliding 3% to close at $22.88.

The KBW Bank Index ( I:BKX) declined over 2% to close at 54.06, as bank stocks pretty much moved in line with the broad indexes. Following a five-week market rally, MKM Partners chief market technician Katie Stockton said early on Monday that some measures of investors sentiment had reached "worrisome" levels, although she didn't expect an immediate market correction.

Morgan Stanley

Morgan Stanley's shares have now returned 20% year-to-date following a 28% return during 2012. With the stock having one of the strongest year-to-date runs among large-cap banks, it shouldn't be a surprise to see some profit taking.

The shares trade for 0.9 times their reported Dec. 31 tangible book value of $26.81, and for 9.2 times the consensus 2014 earnings estimate of $2.49 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.04.

Excluding debit valuation adjustments (DVA), Morgan Stanley reported 2012 earnings from continuing operations of $3.055 billion, or $1.59 a share, compared to a net loss of $136 million, or eight cents a share, in 2011. Adjusted net revenue rose to $30.514 billion in 2012 from $28.555 billion in 2011. 2011 earnings were lowered by several "strategic actions," including the conversion of preferred shares in Mitsubishi UFJ Financial Group to common shares, and a settlement with MBIA ( MBIA). These items cost the firm $1.7 billion apiece in 2011.

Compensation expenses declined to $15.6 billion in 2012 from $16.3 billion the previous year, while other expenses rose only slightly to $10.0 billion in 2012 from $9.8 billion in 2011.

Morgan Stanley's return on average equity from continued operations during 2012 was 3.6%.

The company said that it had already met its goal to reduce its fixed-income risk-weighted assets to $280 billion from $390 billion at the end of the third quarter of 2011, and was on track to reduce RWA to $255 billion by the end of 2013. Morgan Stanley projects that RWA will decline to less than $200 billion by the end of 2014, setting up an increased return of capital to investors.

In its earnings release on Jan. 18, the company also said it would accelerate its purchase of the remaining stake in its brokerage joint venture with Citigroup ( C), to complete the purchase by the end of 2013. Morgan Stanley said that having full ownership of the brokerage will enable "greater order flow capture," increase deposit funding and lower expenses by eliminating the joint venture agreements.

Drexel Hamilton analyst David Hilder rates Morgan Stanley a "buy," with a $25 price target, and estimates the company will earn $2.00 a share this year, with EPS increasing to $2.84 in 2014. The analyst said that he expected the company's actions, "along with what we expect to be rebounding volumes in capital markets businesses, to allow MS shares to continue to improve in valuation."

"Perhaps the most financially significant of MS's announcements was the plan to reduce operating expenses by $1.6 billion per year, assuming flat revenues, by 2014, on top of the $500 million expense reduction in 2012," he said.

MS Chart MS data by YCharts

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

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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.