Cut this giant bank some slack.

Earnings season is underway and, as usual, Wall Street is kicking off the season with the largest U.S. banks reporting first. Among the notable names is industry giant Morgan Stanley (NYSE:MS), which reported its fourth quarter and full-year 2023 financial results this morning.

Expectations are especially high given that rival bank Goldman Sachs (NYSE:GS) posted an impressive 51% year-over-year revenue increase in the fourth quarter. This is a tough standard for Morgan Stanley to adhere to, but perhaps investors shouldn’t obsess over comparisons.

Instead, consider each reporting company a separate, unique business with its own unique challenges and growth stories. For Morgan Stanley, the problem is identifiable and temporary in nature.

Banking indicators to watch out for

The following are financial metrics you may not be familiar with, but are important for evaluating the quarterly and annual performance of major U.S. banks. This is known as ROTCE, which stands for Return on Average Tangible Common Stock.

According to Goldman Sachs, ROTCE is “calculated by dividing annual net income attributable to common stockholders by average monthly tangible common stock equity.” This is a commonly used metric in the financial sector to assess a company’s overall performance, and ideally a bank’s ROTCE should be above 10%.

However, given the circumstances, achieving a ROTCE above 10% in 2023 would have been difficult for Morgan Stanley. As the title of this article suggests, investors should take some leeway when evaluating an investment bank’s recent performance.

First of all, Morgan Stanley is going through big changes. James Gorman, the company’s CEO for 13 years, has resigned. His successor, Ted Pick, assumed the role of CEO on January 1.

“We begin 2024 with a clear and consistent business strategy and a unified leadership team,” Pick confidently declared.

However, during a CEO change, some efficiency in a company’s operations may be lost. Therefore, investors should consider these challenges and understand that a CEO transition is a temporary issue.

Moreover, Morgan Stanley paid two significant one-time charges last year. First, the Federal Deposit Insurance Corporation (FDIC) imposed a “special tax of $286 million before tax ($218 million after tax)” on Morgan Stanley. The company also “was required to pay legal fees of $249 million before tax ($234 million after tax) related to certain matters, which had a negative impact of 28 cents on diluted earnings per share.”

It’s smart of Morgan Stanley to call this a “subject legal complaint.” The ugly truth is that this was a legal settlement involving alleged block trade fraud. But this is also a temporary financial setback for Morgan Stanley and one we hope will not be repeated.

Returning to the topic at hand, Morgan Stanley reported a Q4 ROTCE of 8.4%, and full year 2023 ROTCE of 12.8%.

“For 2023, the company reported solid ROTCE against a mixed market backdrop and multiple headwinds,” Pick summarized.

Perhaps the “mixed market backdrop” includes high interest rates and the banking crisis of March and April 2023, which led to the collapse of smaller rivals such as First Republic Bank and Silicon Valley Bank.

MS stock: good value if it falls further

The market’s immediate reaction to Morgan Stanley’s fourth quarter and full-year results today was to lower Microsoft stock by a few percentage points. However, if you look at the company’s actual results and put them into context, you may decide that there is good value here.

Morgan Stanley’s net revenue in the fourth quarter of 2023 was $12.9 billion, compared to $12.7 billion in the same quarter last year. For the full year, the company generated net revenue of $54.1 billion in 2023, compared to $53.7 billion in 2022. Accordingly, Morgan Stanley’s top-line performance has remained steady despite the aforementioned challenges.

Looking at the bottom line, Morgan Stanley earned 85 cents per share in the fourth quarter of 2023, compared to $1.26 per share in the same period last year. I think this is what has made the market feel bad about Morgan Stanley. However, keep in mind that these results include the one-time costs already mentioned.

Finally, Morgan Stanley reported full-year 2023 net income of $5.18 per share, compared to $6.15 per diluted share in 2022. That’s not surprising by now, considering Morgan Stanley’s fourth-quarter earnings decline.

I wouldn’t exactly call Morgan Stanley “resilient,” but given the extraordinary circumstances, last year’s results weren’t bad. If the market continues to react negatively and Microsoft stock falls into the $70s, this could be a good value for enterprising investors.