MS Morgan Stanley

By Ben Eisen and Justin Baer 

Morgan Stanley got hit hard Monday.

On a day when the six largest U.S. banks all dropped more than the broader market, Morgan Stanley's shares took the worst beating. The lender was down 6.9% as the S&P 500 dropped 1.4%. Since the start of the year, Morgan Stanley shares are down 29%.

Here are a few factors that may have contributed to the selloff:

   -- Low returns. The Wall Street firm, which remains short of its goal of 
      producing a return on equity of at least 10%, is overhauling a 
      fixed-income trading business whose choppy results have frustrated 
      executives and investors alike. Morgan Stanley has installed new managers 
      and slashed its workforce. 

On Tuesday, its head of trading will deliver what shareholders hope will be a clear roadmap to higher returns at Credit Suisse Group AG's financials conference.

Monday's sell-off, however, may mean those hopes have faded.

   -- Globe trotting troubles. Monday's drop came as Deutsche Bank AG shares 
      fell 9.5% and other European banks declined sharply. 

Morgan Stanley has long been considered by many as having more international exposure than most of its U.S.-based peers, so shares are affected by market action abroad. Its shares tended to react sharply to both positive and negative news about the European debt crisis in 2011 and 2012.

Though the perception that Morgan Stanley has disproportionate overseas exposure isn't necessarily accurate, the market sentiment has been, "the more international the name, the more the downside," said Jeffery Harte, an analyst at Sandler O'Neill + Partners. Citigroup Inc., also seen as having a large exposure to global markets, was down 5.1% Monday.

   -- Small enough to stumble. The bank's market value of $44 billion makes it 
      the smallest of the six major banks. So it could be seen as having the 
      least resiliency to global economic turbulence, including concerns over 
      economic growth, interest rates and loan losses tied to an energy 
      industry pummeled by falling commodity prices. 

Still, there is no perception that Morgan Stanley faces any existential threat. "It's big enough not to have survivorship kind of fears" Mr. Harte said.

   -- The higher they fly, the harder they fall.  Morgan SHItanley's stock had 
      a big run-up through the middle of last year as the bank was expected to 
      benefit from refocusing the business on its retail brokerage. Shares 
      climbed 58% during the two years through June, compared with 25% during 
      the same period for the KBW Nasdaq Bank Index. When bank stocks sold off, 
      Morgan Stanley's shares were hit more, sliding 42% since the beginning of 
      July, compared with the benchmark's 24%. 

The financial sector sell-off has also hit bond investors. The premium over U.S. Treasurys that investors demanded to be paid on 10-year Morgan Stanley bonds rose 0.15 percentage points on Monday to 2.02 percentage points, according to MarketAxess.

Since the beginning of the year, the annual cost of insuring debt for the six biggest U.S. banks using five-year credit default swaps rose by about a third on average to 1%, according to Anthony Valeri, investment strategist at LPL Financial. Even still, this is far below levels seen in 2008 or 2012.

"It's built into a little bit of a frenzy here. It has knocked down stock prices, but also more on the credit side," said Lon Erickson, who manages $5.3 billion at Thornburg Investment Management. "In general banks and financials have always been a little bit more of a black box situation when you're trying to analyze."

(END) Dow Jones Newswires

February 08, 2016 19:38 ET (00:38 GMT)

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