The Unexpected Bank to Survive the Oil Price Decline

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After a rough start in 2016, with its stock below 20 percent, Morgan Stanley is likely to face lower stock declines since the bank has far less bad energy loans than most its competitors.

A report from Goldman Sachs on Jan. 20 states that Morgan Stanley’s “assumed energy loans” are smaller than Bank of America, Citigroup, Wells Fargo, and JPMorgan Chase. This means the amount of capital needed to build a reserve against bad paper would cost the bank much less than its peers.

Macquarie raised its rating on Morgan Stanley shares from “neutral” to “outperform” and assigned a price target of $33 a share while the stock trades are less than $25. Analysts at Macquarie say the bank would be worth $40 a share if it gave up the FICC business entirely.

However, there is some speculation that Morgan Stanley’s conservative energy exposure is not as exceptional as Macquarie analysts have hyped for the stock. Since 2009, the bank has substantially diminished the percentage of net revenue from fixed income commodities trading (at least 50 percent revenue decline in the fourth quarter). This led to a headcount reduction of 25 percent for the group. Also, plans to exit or unwind areas of the fixed income and commodities business were viewed as strategically unimportant to Morgan Stanley while revenue from its wealth management business has significantly increased.

Any hopes for commodities rests on the prospect of near-bottom oil prices. If recent hedge fund activity is any indicator, the oil market could be in for a rebound. Recently, investors have placed bets on Brent crude futures and scaled back on shorts and options.

Article written by HEI contributor Aliyah Cole.

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