Morgan Stanley Confirms Its Status as the New Reliable
(Bloomberg Gadfly) -- Morgan Stanley can do little wrong, at least for the time being.
The New York lender just capped off fourth-quarter earnings from the major U.S. banks with results that showed the former underdog is settling into its role as one of Wall Street's more reliable, well-balanced firms. To earn that title, Morgan Stanley under CEO James Gorman has met its strategic goals, a feat that has so far proved out of reach for most of its key rivals. These include the restructuring of its fixed-income arm (where revenue was wanting this quarter), a more generous shareholder payout plan and a stronger contribution from its crown jewel: wealth management.
Its longtime bet on the steady-as-she-goes business continues to bear fruit, assisted by a rising stock market that has lifted the value of client assets and respectively, the fees earned by the bank. Wealth management bested its goal of a pretax margin between 23 percent and 25 percent, thanks in part to a compensation ratio that met its targeted level of 56 percent.
The strength of wealth management has helped the bank reach its targeted return on equity, the closely watched profitability metric. After several paltry years of returns outside management's preferred range of 9 percent to 11 percent, Morgan Stanley delivered ROE of 9.4 percent, excluding the impact of changes to tax legislation.
There's plenty of room for profitability to improve, but Morgan Stanley's rising dependability factor hasn't gone unnoticed. Its price to book value, which lagged Goldman's for the better part of the almost two decades that they've both been publicly traded, has caught up:
The thing is, investors aren't the type to celebrate for long, and they'll want reassurance that Morgan Stanley can maintain its consistency. With most expense cuts having already been made and an expected tax cut about to take hold, the question now is whether the bank can capitalize on fresh opportunities, such as bettering its institutional securities arm (which already includes a market-leading equities platform) and searching for growth in its investment-management division.
If it does, and if its wealth-management arm continues to deliver the goods, Gorman may have a relatively easy time achieving the bank's refreshed target of ROE between 10 percent to 13 percent much sooner than its "medium-term" horizon.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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