Bank Stocks Hammered: Italian Uncertainty Losers

NEW YORK ( TheStreet) -- Morgan Stanley ( MS) was the loser among the largest U.S. banks on Monday, with shares sliding 7% to close at $22.03.

The Dow Jones Industrial Average and S&P 500 ( SPX.X) Index saw 2% declines, while the NASDAQ Composite was down over 1%, as investors worried that the uncertain outcome of elections in Italy could lead to a coalition government and a possible reversal of the country's previous austerity measures.

The KBW Bank Index ( I:BKX) was down 3% to close at 53.02, with all 24 index components showing declines.

Shares of Bank of America ( BAC) declined 4% to close at $11.03. Citigroup ( C) was also down 4%, closing at 41.15.

In the only major U.S. economic release on Monday, the Federal Reserve Bank of Texas said that "Texas factory activity expanded in February, the Texas production index declined to 6.2 from 12.9 in January, suggesting "growth continued but at a slower pace."

The Dallas Fed said "other measures of current manufacturing activity also indicated slower growth in February. The new orders index was positive for the second month in a row, although it fell from 12.2 to 2.8."

Morgan Stanley


Shares of Morgan Stanley have returned 15% this year, following a 28% return during 2012. The shares trade for 0.8 times their reported Dec. 31 tangible book value of $26.81, and for 8.7 times the consensus 2014 earnings estimate of $2.53, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.10.

The renewed uncertainty in the market on Monday underlines investors' concern over Morgan Stanley's risk to "peripheral" European countries, including Greece, Ireland, Italy, Spain, and Portugal. This exposure totaled $6.3 billion as of Dec. 31, with Italy representing $3.2 billion in credit risk.

The company saw a sharp improvement during 2012, with earnings from continuing operations (excluding debit valuation adjustments) 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. The 2011 bottom line was 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). Each of these items cost the firm $1.7 billion.

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 take full ownership of the unit 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.

Wells Fargo analyst Mathew Burnell rates Morgan Stanley "market weight," with a valuation range of $21.50 to $23.50, estimating the company will earn $2.00 a share this year, with EPS increasing to $2.30 in 2014.

The analyst in a report on Jan. 18 called Morgan Stanley's strategic plan "a clear path to improved returns," but said that "hard work remains."

CEO James Gorman said during the company's earnings conference call in January that Morgan Stanley's various initiatives and "returning excess capital" could push the company's return on tangible equity to 12%. But according to Burnell, the company's target return will "only meet its cost of capital, suggesting valuation near tangible book value in more than a year."

Morgan Stanley's fourth-quarter results also suggested that "revenue improvement is needed as much as capital efficiency to improve returns in the business," Burnell wrote.

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 TheStreet.com 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.