MS Morgan Stanley

By Liz Hoffman 

Morgan Stanley on Thursday posted record annual revenue and profit and set new financial targets higher.

The firm capped off a mixed week for big U.S. banks, which reported mostly strong fourth-quarter earnings during a period marked by a Federal Reserve interest-rate cut and fierce global tensions. Giants JPMorgan Chase & Co. and Citigroup Inc. sailed through, while Goldman Sachs Group Inc. and Wells Fargo & Co. both took big legal charges that dragged down profits.

Morgan Stanley's fourth-quarter earnings of $2.2 billion, or $1.30 a share, on $10.9 billion in revenue topped expectations of analysts polled by FactSet. For the full year, it posted $9 billion in profit on a record $41.4 billion in revenue.

Shares rose as much as 7.5% Thursday morning, on pace for their best day since the day after the 2016 election.

Contributions came from all four of its major businesses -- investment banking, trading, wealth management and asset management -- and lower taxes. Costs rose, in part because of $124 million in severance paid to thousands of employees let go last month, and a private-equity investment in Asia delivered a one-time gain.

Morgan Stanley's return on tangible equity, a measure of profitability, was 12.9% for the year, excluding one-time tax benefits. On Thursday, Chief Executive James Gorman set a new goal of 13% to 15% by 2021 and as high as 17% in the future, a level currently achieved only by JPMorgan among major U.S. banks.

He also set new targets for firmwide expenses and profit in Morgan Stanley's giant retail brokerage. Now in his 10th year, Mr. Gorman -- a no-nonsense Aussie who pledged $1 million last week to aid in wildfire relief there -- is repeating a cycle that has worked well for him: Set modest financial targets, hit them, then inch forward the goal posts.

For years, Mr. Gorman has sounded impatient with bank analysts who pestered him for new targets. On Thursday, he compared them to "kids in the backseat of the car, asking 'when are we going to get there?' Well, we kind of got there," he said. "There's no compelling reason, with normal economic growth and expense discipline...why these returns shouldn't be achievable."

He has lately sounded acquisitive, eager to use the goodwill he has accumulated with investors and regulators to strike a deal. He tested the waters in Washington last year by acquiring Solium, a startup that manages stock for employees. Helping his cause now: Morgan Stanley shares are up 25% since Sept. 30, which makes them a better currency.

A likely area of expansion is in asset management, where Morgan Stanley is smaller and nichier than peers. With $550 billion in assets, it is undersized in fixed-income offerings and has sat out the passive exchange-traded fund wave entirely -- consistent with Mr. Gorman's broader view in money management that people pay for expertise, not automation.

That view is being tested, as robo advisers court younger investors and funds that simply mirror the market are now bigger than those trying actively to beat it. Wealth managers such as Morgan Stanley and Merrill Lynch are also likely to face new competition as bulked-up discount brokerages try to replace trading commissions, which have fallen to near zero, with advisory fees.

Mr. Gorman is betting his firm's sheer size -- retail client assets rose $135 billion to $2.7 trillion in the fourth quarter -- and belated rollout of a digital platform will sustain it. The wealth division is integrating Solium, which manages the share compensation for 1 million employees at thousands of companies, though so far has converted just 5,000 of them into wealth-management clients.

Morgan Stanley's investment banking fees rose 11%, its best fourth quarter in a decade. The firm said a surge in initial public offerings in Asia helped offset a decline in merger fees.

Trading revenue rose 28%, compared with gains of 55% at JPMorgan and 33% at Goldman Sachs. The gains at all three firms look unusually large because the year-ago period, in late 2018, was a particularly bad one for bank trading desks. "We didn't see the typical late-in-the-year slowdown in the markets this year," Chief Financial Officer Jonathan Pruzan said in an interview.

Its asset-management division had a record quarter, helped by a six-year-old private-equity investment in Asia that delivered a big one-time gain. Quarterly profit doubled from a year ago, to $985 million, and the launch of new credit products helped bring in fresh money.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

January 16, 2020 11:20 ET (16:20 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.