Headwinds Including Peak NII, Higher Beta Sensitivity, Slower NNA Forces Analyst To Double Downgrade Morgan Stanley

Wolfe Research analyst Steven Chubak downgraded Morgan Stanley MS from Outperform to Underperform with a $92 price target in a Wednesday note titled "See Better Wealth Alternatives at Current Valuation: Downgrade MS to Underperform."

MS has been a Top Pick of Chubak since March 2020, and management has executed extraordinarily well, producing consistent share gains across its Wealth, Asset Management, and Institutional businesses while successfully integrating two large acquisitions. 

It has also translated into significant outperformance, with shares rallying +150% over that period, well ahead of both the S&P (+51%) and BKX (+49%). 

However, great companies don't always make great stocks. While MS continues to execute well and will likely reaffirm long-term targets at the January Strategic Update, environmental headwinds, including peak NII, higher beta sensitivity, slower NNA, and relatively full valuation, forced Chubak to the sidelines.

Chubak struggled to reconcile MS's current trading multiple at a premium to G-SIB peers and Retail Broker peers, including LPL Financial Holdings Inc LPLA and Raymond James Financial, Inc RJF, as, over the last decade, MS has traded at an average discount to LPLA and RJF.

MS is not immune to NII headwinds which Chubak expects to peak in 4Q and 1H23. The combination of higher-cost funding + slower loan growth + normalization of cash levels (% AUM) suggests NII is peaking (even in the absence of rate cuts) and could come under further pressure.

 MS has been a relative standout in organic growth these past couple of years, tracking in line with best-in-class peers. However, the industry entered a more challenging period where reduced advisor churn should pressure Wealth NNA; coupled with recent outflows at MSIM, NNA run-rate in '23 will likely fall below the three-year target of $1 trillion.

MS is one of the better-capitalized G-SIBs under the current capital regime, but higher CET1 requirements from Basel 4 could meaningfully weaken excess capital levels. MS has higher sensitivity to equity market declines. 

Price Action: MS shares traded higher by 1.01% at $86.59 on the last check Wednesday.