Morgan Stanley (MS) is slowly emerging as America’s number one bank. The banking giant is having its best year since 2006 having already brought in a net income of $5.5 billion since the beginning of the year through to the end of September. Supported by a business model that is proving to bring in reliable earnings, the bank’s stock could rise by as much as 20% over the next year, according to Barron’s.
Year to date, Morgan Stanley’s share price has already risen by just under 20%, closing at a price of $50.61 at the end of trading on Monday. By comparison JPMorgan Chase & Co. (JPM) has risen by just over 15% since the start of the year, Goldman Sachs Group Inc. (GS) is up less than 1% for the year, and Bank of America Corp. (BAC) has risen by over 22%. The KBW Nasdaq Bank Index (BKX) is up just under 10% since the beginning of the year.
Morgan Stanley’s stock is trading at 12.5 times estimates of forward earnings, which is well below the overall market’s of 18 times, according to Barron’s. (To read more, see: Bank Stocks Set to Shine as Fed Tapering Begins.)
Around three years ago, while still feeling the after effects of the subprime mortgage crisis, Morgan Stanley was in the middle of implementing a new business strategy that appears to be paying off. That strategy was to focus more attention on its wealth and asset management business, and less on the much riskier business of stock and bond trading.
The shift away from trading alone has been a good move considering the troubles other banks have been having in that line of business. Low volatility has made it difficult to profit from bond trading, and one of the reasons Goldman’s stock has not performed as well is that it is much more reliant on its trading revenues than other banks. (To read more, see: Big Banks Facing a Trading Slowdown.)
Despite a tougher trading market, however, Morgan Stanley has not completely abandoned its trading division and the bank did top CEO James Gordon’s $1 billion quarterly target for bond trading revenues in the most recent quarter.
More Wealth Management
The real driver of the bank’s revenues though, is coming from its wealth management division. Since the summer of 2014 the bank has increased the assets that it manages for a fee to more than $1 trillion from around $700 billion.
The bank’s lending balance has also risen from a mere $39 billion at the end of 2013 to around $80 billion. The interest income it earns within the wealth management division has risen $1.6 billion over a similar time period, going from $1.9 billion in 2013 to $3.5 billion last year. That income could climb to as much as $4 billion this year, according to Barron’s.