Morgan Stanley (NYSE: $MS) Sinks 5%+ on Thursday on Report of Money Laundering Probe by Regulators

Morgan Stanley (NYSE: $MS) is a major global wealth management firm and investment bank with over $1.4 trillion in assets under management based in Midtown Manhattan, NYC. It has offices in over 40 countries and over 75,000 employees.

On Thursday, April 11, 2024, a WSJ report stated that the bank was under investigation by multiple federal regulators over possible money laundering activity in its wealth arm.

Regulators Probe Morgan Stanley

According to the WSJ report, the SEC, the OCC, and the Treasury Department are looking into Morgan Stanley, citing anonymous sources. The latest probes come after the Federal Reserve launched a similar probe in November 2023.

Regulators are investigating whether the bank correctly vetted its clients’ sources of wealth and properly monitored its wealthy clients’ financial activity.

One client being investigated is a Russian billionaire who has been sanctioned in the UK, and another is a client with wealth exceeding her stated occupation. According to the report, the client claims she is in the US, but her trading activity at the E-Trade brokerage indicates she is based in the Caribbean.

While some clients who raised red flags were kicked off E-Trade, they still managed to conduct business with the company’s financial advisor unit. In January, the SEC announced that it was charging a former bank executive with fraud in its Block Trading Business.

Executive chairman James Gorman told the WSJ in January that the bank would cooperate with all investigations. He added that the bank was investing in technology, including AI, to better monitor the money entering its system.  

According to the WSJ, in 2023, the SEC sent the bank a list of current and former clients for information, which overlapped with a list of clients from the Treasury.

Morgan Stanley’s Wealth Management Arm

In February, the WSJ reported that Morgan Stanley planned to lay off hundreds of employees from its wealth management arm. Despite the layoffs, the wealth management business remains a critical part of the company’s business.

In its Q4 and fiscal 2023 report, the wealth management arm generated $26.3 billion in revenue out of a total revenue of $54.1 billion. It added $282 billion in net new assets, a 7% year-over-year increase.

The ongoing multi-agency probe comes amidst intensified scrutiny of how banks vet their ultra-wealthy clients. In 2023, the Federal Reserve fined Deutsche Bank $186 million for failing to monitor money laundering activity properly.

Recent Moves by Morgan Stanley Investment Management

While the bank’s wealth management arm is under investigation, its investment management arm has been making several moves. On April 1, the bank announced that it had invested in The Pasha Group, a maritime transportation firm, to support its expansion plans in Hawaii.

The bank announced on April 2 that its investment management arm had acquired a controlling stake in Resource Innovations, a company focused on sustainability and energy efficiency.

On April 8, Morgan Stanley Direct Lending Fund, a business development company under its investment management arm, announced it would release its Q124 results on May 9, 2024. While this is only a small portion of the investment arm’s overall activities, investors will be closely monitoring the event to get a glimpse of how the bank is performing overall.

The results will come after Morgan Stanley releases its Q124 results on April 16, which investors will undoubtedly be monitoring closely.

Major Banks to See Profits Shrink in the First Quarter

Analysts forecast that major banks like JPMorgan Chase, Citigroup, and Wells Fargo will see their profits shrink compared to Q1 2023 but increase compared to Q4 2023. It will be the first time that major banks have seen a year-over-year drop in quarterly profits since the Fed started hiking rates in Q2 2022.

The big banks will begin releasing their Q1 results reports next week, and investors are eagerly awaiting them. Analysts forecast that the major banks will report slowed loan demand, with a 76% surge in bad debt write-offs. The analysts also forecast that new provisions set aside to cover future bad debts will rise 31%.

However, investors do not seem worried. What could drive the stocks higher would be positive guidance for the rest of the year based on expectations that the Fed will cut rates around June.

MS Stock Performance

MS shares sank 5.25% on Thursday, following the exclusive WSJ report, to $86.84. Year to date, the stock is down 7.52%, while it is up 1.60% over the past 52 weeks, compared to the 52.09% gain of JPMorgan Chase and the 20.36% gain of Goldman Sachs.

Morgan Stanley Analysts’ Outlook

16 Wall Street analysts give MS stock an overall moderate buy rating. They forecast a broad range for the stock, with a high of $116 and a low of $87. Their average price target for MS is $98.60, which is a 13.54% upside from the last closing price.

Is MS Stock a Buy?

Morgan Stanley is one of the biggest investment banks in the world. While regulators are currently investigating it, its fundamentals are solid. In its most recent financial results, the bank reported a net income of $9.1 billion and an ROTCE of 8.4%. While the shares could falter in the short term amid the investment, it has the depth to recover from any short-term hits.

Additionally, the expected Federal rate cut could help boost the company’s revenue as loans become more affordable. Consequently, MS investors could see healthy returns once the bank overcomes the current bad news and the Fed cuts rates.

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