Morgan Stanley: Financial Winner

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the winner among the largest U.S. banks on Friday, with shares rising over 3% to close at $23.58.

The broad indices all saw 1% gains following two days of declines, driven by the positive reaction to Hewlett-Packard's ( HP) better-than-expected fourth-quarter results. HP's shares were up over 12% to close at $19.20.

There were no major economic releases Friday. Market-research firm FactSet said in a press release that large publicly traded companies were continuing to beat expectations. "Of the 429 S&P 500 companies that have reported earnings to date for the fourth quarter, 72% have reported earnings above estimates. This percentage is slightly above the average of 69% recorded over the past four quarters."

What really has set the fourth-quarter results apart is that 66% of reporting S&P 500 companies have beaten consensus revenue estimates. "This percentage is well above the average of 50% recorded over the past four quarters," according to FactSet.

The KBW Bank Index ( I:BKX) was up over 1% to close at 54.50, with all 24 index components rising for the session.

Warning From a Federal Reserve Governor

Federal Reserve Board Governor Jerome Powell said at a monetary-policy conference in New York on Friday that the federal government's large increase in debt "to around 75% at the end of this fiscal year" was "consistent with other increases in sovereign debt for advanced economies after severe financial crises during the post-World War II period."

Powell went on to say that "history and common sense suggest that the federal government should again run primary surpluses sufficient over time to reduce debt to pre-crisis levels of perhaps 35% to 40% of GDP. That would leave fiscal space to address the coming wave of health and pension costs, as well as unexpected new shocks."

Unfortunately, even if the if recent federal tax increases and spending cuts are not reversed, it would be "reasonable" to project that "the ratio of debt to GDP will be roughly stable at around 75% through about 2020," according to Powell. "After that, under current policy, health-care costs and, to a much lesser extent, pension costs will produce a sharp, sustained increase in the ratio of debt to GDP."

Morgan Stanley

Shares of Morgan Stanley have returned 24% this year, following a 28% return during 2012. The shares trade for 0.9 times their reported Dec. 31 tangible book value of $26.81, and for 9.3 times the consensus 2014 earnings estimate of $2.53, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.10.

Investors' increased comfort with Morgan Stanley is perfectly illustrated by the decline in the company's bond rate spreads. The company on Wednesday issued a 10-year bond paying 3.75%, which was 178 basis points above the yield on 10-year U.S. Treasury bonds. In July 2011, Morgan Stanley issued a 10-year bond with a coupon of 5.50%, which was 250 basis points over the 10-year Treasury yield. That bond traded wider to a spread of about 500 basis points in June of last year, according to Bloomberg.

Morgan Stanley said in its earnings release in January that the company had already met its goal to reduce 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.

The company also said it would accelerate its purchase of the remaining stake in its brokerage joint venture with Citigroup ( C) to assume full ownership of the unit by the end of 2013. Morgan Stanley said having full ownership of the brokerage will enable "greater order flow capture," increase deposit funding and lower expenses by eliminating the joint venture agreements. MS Chart MS 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.