Following the release of the results of the Dodd-Frank Act supervisory stress test 2020, the Federal Reserve informed Morgan Stanley MS that it needs to maintain a Stress Capital Buffer (“SCB”) of 5.9% from Oct 1, 2020, to Sep 30, 2021. This is higher than the SCB requirement of other big banks.
For banks like Bank of America Corporation BAC and Citigroup Inc. C, the SCB requirement is 2.5%.
Despite having to maintain a higher capital buffer, Morgan Stanley seems well-positioned to be able to sustain its current dividend payments in the near term.
Notably, the SCB requirement results in a CET1 ratio (based on the U.S. Basel III Standardized Approach) of 13.4%. And, as of Mar 31, 2020, Morgan Stanley’s CET1 ratio was 15.7%.
The company’s CEO and chairman, James P. Gorman, said, “The CCAR 2020 results affirm our strong capital position and reflect the stability of our business model. We anticipate continuing to pay our quarterly common stock dividend of $0.35 per share.”
Although like other firms Morgan Stanley also suspended its share buyback program in March to provide liquidity to the people affected by the coronavirus outbreak, the company’s earnings strength makes it well-poised to be able to enhance shareholder value through continued dividend payments.
Moreover, it remains on track to complete the acquisition of Arlington, VA-based E*TRADE Financial ETFC for $13 billion in fourth-quarter 2020. The deal is expected to help Morgan Stanley further diversify its business model, and will likely add to its excess capital and liquidity positions.
Thus, even though the Fed has ordered banks to suspend buyback programs for the third quarter of 2020 and has put a limit on dividend distributions, Morgan Stanley is expected to be able to continue to pay the current level of dividend and might not have to cut dividends when it resubmits its payout plan in the fourth quarter.
Notably, Gorman stated, “The updated capital rules provide us flexibility to deploy our excess capital, and we will reevaluate our capital actions when we have more confidence in the shape and path of the economic recovery.”
While persistently increasing expenses are expected to hurt Morgan Stanley’s bottom line in the near term, the company’s continued focus on strengthening the corporate lending operations and less capital-market dependent operations will likely support top-line growth.
Shares of the company have lost 7.6% over the past six months compared with the industry’s decline of 16.5%.
Currently, Morgan Stanley carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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