Morgan Stanley Hit Hardest in Bank Selloff
09 February 2016 - 12:05PM
Dow Jones News
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 reveal how much of what's
driving the shares of Morgan Stanley and other banks is out of
their control.
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 19:50 ET (00:50 GMT)
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