Morgan Stanley's Earnings Rise on Strength in Wealth Management -- 3rd Update
October 17 2017 - 5:41PM
Dow Jones News
By Liz Hoffman
Morgan Stanley chief James Gorman's outsize bet on wealth
management is paying off in a big way.
The firm's army of brokers -- many of them far from Wall Street,
scattered at 600 offices from Eugene, Ore., to Alpharetta,
Ga.--more than compensated for a continued slowdown in trading and
set Morgan Stanley on track for its most profitable year in a
decade.
Morgan Stanley's $5.5 billion in net income for the first nine
months of the year is its best showing since 2007. In the third
quarter, the firm posted earnings of 93 cents a share and revenue
of $9.2 billion, which were both higher than a year ago and easily
beat analyst expectations.
Morgan Stanley, along with Goldman Sachs Group Inc., rounded out
big banks' quarterly earnings Tuesday. The five biggest Wall Street
firms all improved from a year earlier, each relying on a different
cocktail to overcome continued torpor in the once-lucrative
securities business. J.P. Morgan Chase & Co. and Citigroup Inc.
leaned on commercial lending and credit cards. Bank of America
Corp. was aided by lending and expense discipline, while investment
gains and merger fees helped Goldman.
Morgan Stanley's engine is increasingly is its wealth-management
business, which oversees $2.3 trillion for 3.5 million Americans
and continues to rake in assets. It is the centerpiece of Mr.
Gorman's effort to turn Morgan Stanley from Wall Street's problem
child to a steadier firm prized by investors, largely by focusing
on wealth and asset management.
Those businesses are ascendant on Wall Street. Baby boomers have
hit their peak earning years and are managing for retirement, while
the number of millionaires looking for advice and concierge
services is growing. Meanwhile, postcrisis rules and quiet markets
have shackled trading desks and raised the cost of the capital they
need to operate.
The boom in wealth management extends beyond Wall Street.
Regional brokerage Edward Jones recently passed the $1 trillion
mark in total client assets.
At Morgan Stanley, the firm's multiyear purchase of Citigroup
Inc.'s brokerage, Smith Barney, is now fully integrated, and
executives have squeezed much of the obvious savings from the
business. Quarterly revenues of $4.2 billion and a profit margin of
26.5% in the quarter were both records.
"The obvious low-hanging fruit is off the table," Mr. Gorman
said Tuesday. "But these businesses are scale businesses," so
profitability should improve as account balances grow.
A key initiative is pushing mortgages and other loans to
wealth-management clients, which hit a record $76 billion at the
end of the quarter. Another is adding digital offerings -- Morgan
Stanley is rolling out a robo adviser for smaller account balances
-- hopefully without losing the loyalty of its 15,800 human
brokers.
The old model of charging clients commissions to buy and sell
stocks is falling away, with Morgan Stanley and rivals embracing a
model where advisers charge a flat fee to manage portfolios.
Morgan Stanley's assets in this type of account topped $1
trillion for the first time last quarter, up from $855 billion a
year ago. Bank of America Corp., which encompasses the giant
brokerage Merrill Lynch, also surpassed $1 trillion in fee-based
assets in the quarter, up from $871 billion a year ago.
These accounts face fewer regulations and appear to better align
brokers' incentives with those of clients. And because they don't
rely on clients to buy and sell stocks and bonds to generate fees,
they are more resilient in calm markets, when trading appetite
falls. They are also less vulnerable to the shift from actively
managed portfolios to passive approaches.
Like Morgan Stanley, Bank of America's wealth division also had
a strong quarter. Its business posted a pretax profit margin of
27%.
Morgan Stanley's return on equity, a key measure of how
profitably it invests shareholders' money, stood at 9.6% in the
quarter and 9.8% through the first nine months of the year. Mr.
Gorman has targeted a minimum of 9% for the full year.
Trading revenue fell 8%, mirroring declines at rivals as fewer
idiosyncratic events such as Brexit or central-bank moves did
little to spark client activity.
"We saw the same issues that most others did," Chief Financial
Officer Jonathan Pruzan said.
Revenue from stock-trading was flat at $1.9 billion. As Wall
Street's leader in that business, with a 30% share of fees, Morgan
Stanley has little room to grow. But guarding its turf remains a
priority for Edward Pick, the former equities chief who now runs
the firm's overall trading operation.
Morgan Stanley's smaller fixed-income division, which trades
bonds, commodities and other products, reported $1.2 billion in
revenue, down 21% from year ago but still clearing a $1 billion
quarterly target set out by Mr. Gorman a year ago. Interest-rates
and currencies trading was particularly slower, Mr. Pruzan
said.
Fixed-income trading was down 27% at J.P. Morgan and 26% at
Goldman Sachs.
Write to Liz Hoffman at liz.hoffman@wsj.com
(END) Dow Jones Newswires
October 17, 2017 17:26 ET (21:26 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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