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View the Euromoney 25 |
Whichever way you look at it, Morgan Stanley had a successful 2017.
In almost every business line, its performance improved. Market shares grew or were maintained. At various points during the year, its market capitalization overtook that of its arch-rival Goldman Sachs, which would have been unthinkable even a couple of years ago.
Chief executive James Gorman always writes out by hand a list of 10 things he wants to achieve in the year ahead. You suspect that, as the year drew to a close, sitting in his office high above New York’s Times Square, he put a tick in the margin against most of those aims for 2017.
Investors seem to like what they are seeing too. Morgan Stanley’s share price is up around 20% on the year, with its market cap nearing the $100 billion mark, trebling in the last five years, and its stock is now trading at 1.3 times book.
“The stock market is validating our strategy and we are absolutely committed to that strategy,” says Morgan Stanley president Colm Kelleher. “We like the balance of our business, of around 50% institutional securities and 50% wealth and investment management. We’ve grown market share in investment banking; our global equities business is outstanding; our fixed income model has been validated; and our wealth business is returning a margin of 26.5% against a target of 25% in what is still a low-rate environment.”
It is worth looking more closely at some of these business lines.
Morgan Stanley feels it is finally closing the gap to Goldman Sachs in traditional investment banking. Although still second in global M&A, it tops the league table for equity and equity-linked business, and it has ridden booming US markets to fit well within the top five firms globally in high-grade and high-yield debt.
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James Gorman |
But it is away from event-driven markets that Morgan Stanley performs best these days. Under the leadership of Ted Pick, the equity sales and trading division continues to go from strength to strength. It has become the dominant global equities franchise, with revenues of $6 billion in the third quarter of 2017 and a market share that touches 20%.
Two years ago Pick was tasked with fixing the firm’s troubled fixed income division. Stripped back of risk-weighted assets and people, outsiders thought it might not survive. But for the last six quarters the fixed income division has beaten the publicly stated goal of $1 billion in revenues – sometimes by a considerable margin. In the first half of 2017, Morgan Stanley was actually a top-five global fixed income business – which may surprise even Kelleher and Pick.
Morgan Stanley is struggling to move the needle on year-on-year net revenues in its institutional securities division – marginally up in the second quarter of the year, marginally down in the third, in the $4.5 billion range. Wealth management, which now has $2.3 trillion under management, has been stronger in those terms, growing steadily in each quarter.
And yet, for all that success, Morgan Stanley’s group return on equity for the first nine months of last year was 9.6% – towards the lower end of the target range that Gorman has set.
There is a salutary lesson for all global banks here. A firm doing what it has set out to do, performing well in many of its key areas and yet still producing relatively meagre returns.
You have to ask: is this as good as it gets?
The answer for now, for Morgan Stanley as for others, is probably yes. And it is important to understand why. Before the financial crisis, this was a firm with a balance sheet of almost $1.4 trillion and often poor-quality capital of just £29 billion. Today, it is a firm with a balance sheet of $850 billion, $70 billion of prime capital and on top of that deposits of $160 billion.
It is also a well-run bank. As Kelleher tells Euromoney: “There’s very little fat in Morgan Stanley. As a management team, which importantly has been very stable, we have done a very good job in turning this firm around.”
Under the old regulatory and capital regime, Morgan Stanley would have been generating returns on equity in the mid-30s. Under the new one, it is arguably now at its efficient frontier.
The only way from here to boost returns on equity is to benefit from regulatory and tax changes. And in the US there are hopes this might happen sooner rather than later. Tax changes would particularly help Morgan Stanley, whose business mix, especially in wealth management, is very US-focused. The firm pays a net tax rate of 32% – one of the highest of any S&P500 firm.
The other thing to watch out for is whether or not Morgan Stanley will start to grow its balance sheet again. It is probably sweating its current assets as efficiently as it can.
