Bank Stocks Hammered: Italian Uncertainty Losers
The Dow Jones Industrial Average (^DJI) and S&P 500 (SPX.X) Index saw 2% declines, while the NASDAQ Composite (^IXIC) was down over 1%, as investors worried that the uncertain outcome of elections in Italy could lead to a coalition government and a possible reversal of the country's previous austerity measures.
The KBW Bank Index (I:BKX) was down 3% to close at 53.02, with all 24 index components showing declines.
In the only major U.S. economic release on Monday, the Federal Reserve Bank of Texas said that "Texas factory activity expanded in February, the Texas production index declined to 6.2 from 12.9 in January, suggesting "growth continued but at a slower pace."
The Dallas Fed said "other measures of current manufacturing activity also indicated slower growth in February. The new orders index was positive for the second month in a row, although it fell from 12.2 to 2.8."
Shares of Morgan Stanley have returned 15% this year, following a 28% return during 2012. The shares trade for 0.8 times their reported Dec. 31 tangible book value of $26.81, and for 8.7 times the consensus 2014 earnings estimate of $2.53, among analysts polled by Thomson Reuters. The consensus 2013 EPS estimate is $2.10.
The renewed uncertainty in the market on Monday underlines investors' concern over Morgan Stanley's risk to "peripheral" European countries, including Greece, Ireland, Italy, Spain, and Portugal. This exposure totaled $6.3 billion as of Dec. 31, with Italy representing $3.2 billion in credit risk.
The company saw a sharp improvement during 2012, with earnings from continuing operations (excluding debit valuation adjustments) of $3.055 billion, or $1.59 a share, compared to a net loss of $136 million, or eight cents a share, in 2011. Adjusted net revenue rose to $30.514 billion in 2012 from $28.555 billion in 2011. The 2011 bottom line was lowered by several "strategic actions," including the conversion of preferred shares in Mitsubishi UFJ Financial Group to common shares, and a settlement with MBIA(MBIA) . Each of these items cost the firm $1.7 billion.
Morgan Stanley said in its earnings release in January that the company had already met its goal to reduce fixed-income risk-weighted assets to $280 billion from $390 billion at the end of the third quarter of 2011, and was on track to reduce RWA to $255 billion by the end of 2013. Morgan Stanley projects that RWA will decline to less than $200 billion by the end of 2014, setting up an increased return of capital to investors.