Buy Morgan Stanley on 'Earnings Momentum': Deutsche Bank

NEW YORK ( TheStreet) -- Morgan Stanley's ( MS) "earnings momentum is poised to accelerate," according to Deutsche Bank analyst Matt O'Connor, who late on Thursday upgraded the investment bank's shares to a "buy" rating from a "hold" rating.

Morgan Stanley previously announced plans to purchase its remaining 35% stake in its retail brokerage joint venture with Citigroup ( C), and is awaiting Federal Reserve approval to complete the transaction, which could come "any day," according to O'Connor.

Having the full revenue stream from the joint partnership will boost Morgan Stanley's earnings, as will the continued rise in equity prices.

"MS has previously estimated a $400m lift to earnings from buying in the remainder of the stake, greater order flow capture, elimination of certain expenses and a partial benefit of a pickup in deposits," O'Connor wrote. The analyst expects "an additional earnings boost," as $50 billion in deposits move onto Morgan Stanley's balance sheet over time.

O'Connor added that "if the market holds at current levels, there's about $0.10 of annual EPS lift to come (with a similar additional EPS lift for each further 5% rise in the markets)."

The analyst also sees "meaningful leverage to rising interest rates," for Morgan Stanley, writing that "a 100bp move in rates would boost annual EPS by about $0.20."

The Federal Reserve has kept the short-term federal funds rate in a range of zero to 0.25% since later 2008. Since September, the central bank has been making monthly purchases of $85 billion in long-term securities in an effort to hold long-term rates down.

The Federal Open Market Committee has repeatedly said it was likely to leave the federal funds rate in its current range at least until the U.S. unemployment rate moves below 6.5%. But top FOMC and Federal Reserve officials have given conflicting statements recently about the timing of a curtailment of the Fed's bond-buying.

The market always anticipates monetary policy changes, and the recent rise in market rates on 10-year U.S Treasury bonds could signal a policy change in the near term. The market rate for 10-year U.S. paper was 2.13% on Thursday, increasing from 1.70% a month earlier.

In its first-quarter 10-Q filing with the Securities and Exchange Commission, Morgan Stanley provided an analysis of "instantaneous parallel shocks of 100 and 200 basis point increases to all points on all yield curves simultaneously. An increase in interest rates of 100 basis points would boost annual pretax operating earnings by $581 million, or $406 million if Citigroup's share of the wealth management joint venture was excluded. A 200 basis point increase in rates would boost pretax operating income by $874 million, or $601 million, leaving out Citigroup's share of the joint venture.

O'Connor's price target for Morgan Stanley's shares is $30.00.

Morgan Stanley's shares closed at $25.82 Thursday, returning 36% this year, following a 28% return during 2012. The shares trade at a slight discount to tangible book value when including the entire wealth management joint venture, according to O'Connor.

The shares trade for 10.2 times the consensus 2014 earnings estimate of $2.54 a share, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.08.

O'Connor estimates Morgan Stanley will earn 2.19 a share this year, with EPS climbing to $2.70 in 2014 and $3.10 in 2015.

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.

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