Morgan Stanley: Financial Winner

NEW YORK ( TheStreet) -- Morgan Stanley ( USB) was the winner among the largest U.S. banks on Tuesday, with shares rising 1.86% to close at $22.44.

The broad indexes ended higher after Federal Reserve Chairman Ben Bernanke defended the central bank's "highly accommodative monetary policy," before the Senate Banking Committee. The short-term federal funds rate has remained in a target range of zero to 0.25% since late 2008 and the Fed has been purchasing $85 billion a month in long-term securities, with no offsetting securities sales.

The latest federal spending deadline comes Friday, with "sequestration" requiring spending cuts totaling $1.2 trillion over a 10-year period, including an $85 billion spending reduction for the current fiscal year. Bernanke said that "Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run."

"Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget."

In economic news, the Census Bureau on Tuesday reported that sales of new homes in the United States increased to a seasonally adjusted annual pace of 437,000 in January from an upwardly revised 378,000 during December. Economists expected new-home sales to rise to an annual pace of 383,000, according to Zacks.

The Case-Shiller 20-city index for December showed home prices rising of 6.8% year-over-year, up from a downwardly revised increase of 5.4% the previous month. "The 10- and 20-City Composites, which bottomed out in March 2012 continued to show both year-over-year and monthly gains in December," according to David M. Blitzer, the chairman of the index committee at S&P Dow Jones Indices. Blitzer also said that "these movements, combined with other housing data, suggest that while housing is on the upswing some of the strongest numbers may have already been seen."

The KBW Bank Index ( I:BKX) rose 0.49% to close at $53.28.

The Federal Deposit Insurance Corp. said that the nation's banks earned $34.7 billion during the fourth quarter, increasing 37% from $25.3 billion during the fourth quarter of 2011. For all of 2012, U.S. banking industry earnings totaled $141.3 billion, increasing from $118.4 billion in 2011.

The main factors in the earnings improvement were the continued decline in credit costs, as well as an increase in noninterest income, "driven primarily by higher gains on loan sales (up $2.4 billion, or 132.4 percent, over fourth quarter 2011), increased trading revenue (up $1.9 billion, or 75.3 percent), and reduced losses on sales of foreclosed property (down $1.2 billion, or 72 percent)," according to the FDIC.

The only real black eye for the industry was the continued narrowing of the net interest margin, which is the difference between the average yield on loans and investments and the average cost for deposits and borrowings. Most banks have already realized most of the benefit of historically low funding rates, while assets continued to reprice. The aggregate fourth-quarter net interest margin was 3.32%, declining from 3.57% a year earlier.

Morgan Stanley


Morgan Stanley shares bounced back somewhat Tuesday after dropping 7% Monday on concerns raised by Italian election results. Morgan Stanley is often the most sensitive U.S. financial name when the market reflects worries tied to European sovereign debt. Exchange traded funds that track the Italian and Spanish stock markets were also slightly higher Tuesday.

Shares of Morgan Stanley have returned 17.36% year-to-date, following a 26.37% return during 2012. The shares trade for 72% of book value, according to Thomson One Analytics, and for 10.7 times the consensus 2013 earnings estimate of $2.10 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $2.53.

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."

USB Chart USB 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.