Morgan Stanley Rises: Financial Winner

NEW YORK ( TheStreet) -- Bank stocks gained a bit more steam on Thursday following an increase in estimated second-quarter GDP growth and better-than-expected unemployment numbers.

Morgan Stanley ( MS) was the clear winner among major financial players, with shares rising 1.3% to close at $25.91.

The KBW Bank Index ( I:BKX) rose 0.2% to close at 62.59 with all but seven of the 24 index components up for the session. Large banks seeing shares rise close to 1% included State Street of Boston ( STT), which closed at $67.22; KeyCorp ( KEY) of Cleveland, closing at $11.79; and Zions Bancorporation ( ZION) of Salt Lake City, which closed at $28.35.

The Dow Jones Industrial Average and S&P 500 ( SPX.X) each ended with slight gains, while the NASDAQ Composite with a gain of 0.8%. The broad market was boosted by a report in the Wall Street Journal saying Verizon ( VZ) and Vodafone ( VOD) had rekindled their discussions over a possible Purchase by Verizon of Vodafone's 45% stake in Verizon Wireless.

Verizon's shares rose 3% to close at $47.82 while Vodafone's American depositary receipts rose 8% to close at $31.79.

The Bureau of Economic Analysis raised its estimate for second-quarter U.S. gross domestic product growth to an annual rate of 2.5%, increasing from the advance estimate of 1.7%, and coming in higher than the consensus estimate of a 2.2% growth rate, among economists polled by Thomson Reuters.

The Labor Department said first-time unemployment claims for the week ended Aug. 24 were down by 6,000 to 331,000. Economists on average expected new claims to come in at 332,000. Continuing claims for the week ended Aug. 17 were down by 14,000 to 2.989 million, coming in above the consensus estimate of 2.98 million.

Another Banner Quarter

The Federal Deposit Insurance Corp. reported that the U.S. banking industry earned a record $42.2 billion during the second quarter, increasing from $40.3 billion in the first quarter and $34.4 billion during the second quarter of 2012.

The industry's net interest income declined to $103.7 billion during the second quarter from $104.0 billion the previous quarter and $105.4 billion a year earlier. The industry's second-quarter net interest margin was 3.26%, declining from 3.27% in the second quarter and 3.46% a year earlier.

The market yield for 10-year U.S. treasury bonds has risen over 100 basis points since the end of April, as investors have anticipated a tapering of monthly bond purchases by the Federal Reserve, which have continued at a pace of $85 billion each month since last September.

The widening yield curve will over time have a positive effect on net interest margins. In the meantime, the banking industry's unrealized gains on available-for-sale securities, which had risen steadily as long-term rates declined, nearly evaporated during the second quarter.

Unrealized gains on AFS securities were down by $51.1 billion, or 89% from the previous quarter, according to the FDIC. " Unrealized gains and losses on available-for-sale securities do not affect current earnings, but they do have implications for future earnings if the securities are sold," the agency said.

Credit leverage continued to be a major theme for the industry, with combined provisions for loan loss reserves declining to $8.6 billion, from $11 billion the previous quarter and $14.2 billion a year earlier. The FDIC said that provisions for reserves were at their lowest point since the third quarter of 2006.

The industry's combined loan loss reserves declined by $6.4 billion during the second quarter.

The FDIC said that banks' combined non-interest income grew to $66.9 billion in the second quarter from $66.5 billion the previous quarter and $60.2 billion a year earlier.

Banks continued to see success in their cost-cutting efforts, with the industry's combined efficiency ratio improving to 58.76% during the second quarter, from 58.92% during the first quarter and 61.29% during the second quarter of 2012. The efficiency ratio is, essentially, the number of pennies of expenses incurred for each dollar of revenue.

Morgan Stanley

Morgan Stanley's shares have returned 37% this year following a return of 28% for 2012. The shares trade just below their reported June 30 tangible book value of $26.27, and for 10 times the consensus 2014 earnings estimate of $2.58 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $2.92.

Please see TheStreet's earnings coverage for a review of Morgan Stanley's second-quarter results, which included the firm's acquisition of Citigroup's ( C) remaining stake in the companies' retail brokerage joint venture.

MS Chart MS data by YCharts

Interested in more on Morgan Stanley? See TheStreet Ratings' report card for this stock.

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-- 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 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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