Morgan Stanley (MS), whose $71 billion market cap is less than a fifth that of banking leader JPMorgan Chase & Co. (JPM), has been the worst performer among big bank stocks in 2019, up just 1.5% since the start of the year. It hasn’t been an easy year for the financial industry in general, but Morgan Stanley has had to face revenue declines in its key equities trading business despite stock markets bouncing back following their slump in the latter half of 2018.

What Morgan Stanley Investors Are Watching For

Investors will be looking for some sign of a rebound when the bank reports third quarter earnings, which is expected to occur on October 15. Morgan Stanley is the leader on Wall Street in equities trading, but as that business has taken a hit in recent quarters, investors will want to see that the bank is making efforts to reverse that trend. 

But they will also be looking for evidence that the rebuilding plan of CEO James Gorman, who first took the reins in 2010, is helping to diversify the firm’s businesses in a way that allows it to perform well in all types of markets. Part of that plan has meant focusing more on fee-generating businesses like wealth management while scaling back on the more risky aspects of its trading business. 

Analysts’ 3Q Estimates

Morgan Stanley’s earnings per share (EPS) for the current quarter are expected to show zero growth from a year ago, according to average analyst estimates reported by Yahoo! Finance. That estimate has been revised downward by more than 6% over the past three months. However, earnings have surprised to the upside in the past two quarters. Third-quarter revenue is expected to come in 1% lower than the same three-month period a year ago.

If earnings meet expectations, it would mark a nearly 5% decline from the second quarter, in which earnings came in at $1.23 per share, about 8% above expectations. Revenue, which came in at $10.2 billion for the quarter, took a hit from the 12% drop in trading revenue from a year ago. Revenue from equities trading, while still the highest on Wall Street, fell 14% while fixed-income trading revenues fell as much as 18%, more than double what analysts expected, according to Bloomberg.

Revenue Slump in Lead Equities-Trading Business

The slump in equities-trading revenue wasn’t as bad as the 21% decline experienced in the first quarter, but it’s still not a good sign, especially considering that rival Goldman Sachs Group Inc. (GS) reported a jump in stock-trading revenue. Back in the early 2010s, Morgan Stanley spent heavily on technology in order to dethrone Goldman from its top position in equities trading. Since overtaking its rival, Morgan Stanley has yet to relinquish its crown but it shouldn’t take that position for granted.

Downplaying the recent decline in trading revenues, the firm’s Chief Financial Officer (CFO) Jon Pruzan said, “We’re No. 1 in the world, and we had a very strong quarter. Some of our competitors are coming from a weaker position from a year ago.” But being number one means performing like number one, something investors are going to want to see more evidence of when the firm reports earnings in a couple of weeks. 

Bright Spots in Wealth Management

While trading revenues were down in the second quarter, bright spots included equity underwriting, reflecting Morgan Stanley’s role as one of the lead underwriters for Uber Technologies Inc.’s (UBERIPO, as well as investment management and wealth management. Revenue for the bank’s wealth management division, which manages close to around $2.5 trillion for U.S. clients rose 2% to $4.4 billion.

That puts Morgan Stanley’s wealth-management revenues at around 43% of total revenues, which means its wealth-management business has come a long way since 2006 when revenue from the division represented only 16.5% of total revenues. But it reflects the changes the bank has taken to diversify into less risky lines of business following the 2007-2008 financial crisis. 

Looking Ahead

Despite growing signs of a recession that would depress asset prices and hurt the bank’s growing wealth-management business, Gorman is optimistic that operational improvements, like shifting to fee-based accounts, could help to boost earnings, according to Barron’s