Morgan Stanley (MS) Job Cuts Increase ROE, EPS and the Trading Multiple - UBS

UBS analyst, Brennan Hawken, raised his PT to $42 (from $39) on Morgan Stanley (NYSE: MS) after the Bloomberg story describing a pending 25% cut in FICC. This assumes MS will trade at 12x 2017 EPS and investors will ascribe a higher multiple to a firm that is more focused on capital light, higher ROE businesses.

MS plans to make cuts in its FICC business according to press reports, and these cuts seem bigger and sooner than most investors had expected. Nearly four-fifths of investors did not expect MS to sufficiently restructure FICC in the next year according to a proprietary survey.

Importantly, he estimates that reducing the FICC business by one-quarter would add about 50 bps to firm-wide ROEs if the capital was returned to shareholders. If the capital is instead rolled into the Equities and IBD businesses at current ROEs, he estimates about 125 bps of accretion. The ROE accretion would be even higher if the capital was able to be fully deployed into Wealth Management.

The pace of MS's action is certainly faster than we expected, coming roughly two months after promoting Ted Pick to Global Head of Sales and Trading with responsibility over both FICC and Equities.

MS typically provides a strategic update on its business during its fourth quarter earnings call and we now expect that will include new plans and targets for the FICC business after MS trims the business more substantially. Notably, the transition and reduction of capital from the FICC business could take time, but it is our view that if MS can articulate a clear path (with milestones) to that end state, it can begin to positively impact the valuation of MS shares.

No change to the Buy rating.

For an analyst ratings summary and ratings history on Morgan Stanley click here. For more ratings news on Morgan Stanley click here.

Shares of Morgan Stanley closed at $34.30 yesterday.

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