Wall Street has done an ample amount of self-reflection in the five years since the financial crisis but perhaps none more so than banking powerhouse Morgan Stanley (NYSE: MS). Under the leadership of Australian-born CEO James Gorman, Morgan Stanley has restructured the way it does business. By reducing risk and expanding its more stable operations such as wealth management, Morgan Stanley stands ready to reap the rewards and be at the forefront of today’s changing securities landscape.
Expansion of Wealth Management
Prior to the financial collapse, Morgan Stanley received most of its revenue by way of its massive investment banking and trading unit, while its mid-size wealth management arm was an afterthought. Fast-forward to today and Morgan Stanley is equally divided between the two divisions. Answering questions at a presentation Tuesday, Gorman encouraged investors to think of the company as “two integrated firms.” In 2013, approximately 40%-50% of Morgan Stanley’s revenues came from wealth management, 50% from Institutional securities (IB and trading), and the rest from asset management.
The importance of a larger wealth management arm lies in its stability. Even in times of economic unrest the wealth management division’s earnings would be relatively constant, providing Morgan Stanley with a sizeable buffer against any setbacks in its securities division. Its wealth management earnings doubled to $1.5 billion from 2011 to 2013.
Investment Banking and Trading
So far this year Morgan Stanley is second in advising on mergers and acquisitions at $435 billion trailing only Goldman Sachs (NYSE: GS). In that respect, Morgan Stanley has stayed in line with its status quo. Most of the changes it has undergone in the institutional securities division can be witnessed in its trading unit, and in particular its fixed- income trading desk.
For decades, fixed-income trading produced lucrative profits for Wall Street giants including Morgan Stanley. At one time, nearly 30% of Morgan Stanley’s revenue came from its fixed-income desk- a figure that now stands around 12%. The reason for the pullback is not only is fixed-income trading more risky, but also the returns in fixed income are a fraction of what they once were. To compensate, Morgan Stanley has renewed its focus on equities trading which is safer because banks hold stocks on their balance sheets for shorter periods than fixed income, commodities, and currency. Currently, Morgan Stanley garners about 20% of its revenue from equities trading. It is the only one of the five largest U.S banks to receive more revenue from equities than fixed income.
What does it mean for Morgan Stanley?
Despite creating a risk averse and sturdier business model, Morgan Stanley’s stock price is only a fraction above where it was five years ago. Priced at $31.73, there are some analysts who see it moving to somewhere around $39 per share. Beyond the predicted capital gain, Morgan Stanley intends to raise its dividend as well pending approval from the Federal Reserve.
Even if the stock price has not reflected it, the truth of the matter is Morgan Stanley is in a much better position than it was five years ago when it was on the brink of collapse. It’s not a stretch to assume many banks may copy the banks structure in the coming years. Gorman may not be a traditional CEO, but he seems the perfect fit for a securities environment that isn’t so traditional either.