What next for Morgan Stanley and Citigroup shares?

Morgan Stanley has evolved into one of the world’s preeminent wealth management franchises and dramatically reduced its exposure to volatile securities trading in a major strategy shift under its former CEO James Gorman. His acquisitions of E-Trade, Eaton Vance and the Smith Barney brokerage platform from Citigroup have enabled its client assets to grow to a colossal $6.5 trillion and provide the anchor for secular EPS growth in the next decade. Despite the trade war and hyper volatile markets after Trump’s Liberation Day on April 2nd, wealth management enabled the bank to generate stellar EPS growth in Q2. Wealth management revenues rose to $7.8 billion, up 14% on an annualized basis.

It is ironic that a firm once known as a blueblood investment banking heir of the fabled House of Morgan saw its I-bank revenues fall 5% in Q2 to only $1.6 billion. While trading benefited from the volatile Q2 milieu, fixed income underwriting revenue fell due to a fall in high yield mandate wins and issuance. With a 15% ROE and a 16X forward multiple, I think Morgan Stanley is fairly priced but I would definitely use a profit taking correction in money center banks to accumulate the shares in the 120-125 range for a 150 strategic target using derivatives strategies on the Chicago Board Option Exchange. Morgan Stanley also increased its dividend by 7%, a bullish omen from management though the div yield alone is no reason to buy the stock at 2.65% when the yield on the 10-year Uncle Sam note is not 4.47%.

I have made no secret of my conviction that the restructuring turnaround of Citigroup under CEO Jane Fraser would unlock shareholder value on a massive scale and trigger a valuation rerating to at least tangible book value. I wrote about the money making opportunity in Citi in a half dozen posts since 2023. Citigroup has risen an amazing 32% in the past six months alone as Wall Street has finally regained its lost credere after the New York money center bank’s epic disasters and a near failure/FDIC nationalization during the GFC. Chuck Prince’s decision to go on dancing proved painfully expensive for Citi’s shareholders, who lost more than 90% in its 2009 meltdown.

However, I just cannot accept the idea that Citi will command anywhere near the 2.5 times premium book value at which JP Morgan currently trades on the NYSE. So I must conclude that the easy money on this trade has been made and heed the Street’s folklore that the “trend is only your friend until the trend comes to an end”. At 90, I believe Citi is fairly priced and would need it to come down to 76-78 before accumulating the shares again.