Mor­gan Stan­ley turns to stodgy bank ac­counts to boost its profit

Kuwait Times - - BUSINESS -

NEW YORK: Mor­gan Stan­ley, bet­ter known for un­der­writ­ing bonds than for re­tail bank­ing, plans to of­fer sav­ings ac­counts and cer­tifi­cates of de­posits next year to wring more profit from its wealth man­age­ment clients, ex­ec­u­tives said. The bank has of­fered check­ing ac­counts and credit cards for years, but it is launch­ing more con­sumer bank­ing prod­ucts and giv­ing bro­kers bonuses if clients use them. The goal is to win more of the as­sets that cus­tomers keep at ri­vals such as JPMor­gan Chase & Co or Bank of Amer­ica Corp.

Right now, just 1 per­cent of Mor­gan Stan­ley’s more than 3.5 mil­lion wealth man­age­ment clients ac­tively use its re­tail bank­ing prod­ucts. “You shouldn’t have to deal with two or three fi­nan­cial in­sti­tu­tions,” said Eric Heaton, pres­i­dent of Mor­gan Stan­ley US Banks, in an in­ter­view with Reuters. “Just deal with us.” Mor­gan Stan­ley has no plans to build re­tail bank branches, and will in­stead rely on its 16,000 bro­kers to sell the new prod­ucts.

The ef­fort may leave it look­ing a lit­tle more like a con­ven­tional bank, a move that reg­u­la­tors have been en­cour­ag­ing since the cri­sis. Its chief ri­val, Gold­man Sachs Group Inc, took a sim­i­lar step in Au­gust, when it agreed to buy Gen­eral Elec­tric Cap­i­tal Bank’s on­line de­posit busi­ness. The move is also likely to boost the bot­tom line - clients who ac­tively use Mor­gan Stan­ley’s bank­ing prod­ucts hold on av­er­age 7 per­cent more as­sets at the firm than those who don’t. The an­nual fees that cus­tomers pay are of­ten based on a per­cent­age of the client’s as­sets at the firm.

That fee in­come tends to be rel­a­tively stable over time com­pared with many in­vest­ment bank­ing busi­nesses. The im­por­tance of stable re­sults was driven home for the bank’s in­vestors last month when it re­leased third quar­ter earn­ings that showed rev­enue in its bond trad­ing busi­ness plung­ing 42 per­cent, ex­clud­ing an ac­count­ing ad­just­ment that in­vestors of­ten ig­nore, while rev­enue in its wealth unit, which in­cludes bro­ker­age fees, in­ter­est in­come, and other items, fell just 3.5 per­cent.

Trad­ing losses

Mor­gan Stan­ley’s fee in­come and com­mis­sions have been fall­ing since the be­gin­ning of 2014, which the bank has made up for by gen­er­at­ing more rev­enue from ar­eas in­clud­ing lend­ing. Af­ter multi-bil­lion dol­lar trad­ing losses brought Mor­gan Stan­ley un­com­fort­ably close to fail­ure dur­ing the fi­nan­cial cri­sis, the bank agreed to buy Cit­i­group’s Smith Bar­ney busi­ness in pieces start­ing in 2009, turn­ing its re­tail bro­ker­age busi­ness from be­ing an af­ter­thought into the source of about half the bank’s rev­enue.

Gold­man, by con­trast, re­mains much more heav­ily re­liant on bond trad­ing, stock un­der­writ­ing, and other tra­di­tional in­vest­ment bank­ing busi­nesses to drive its bot­tom line. In­vestors seem to be sid­ing with Gold­man Sachs now - its shares trade at about 1.15 times their book value, an ac­count­ing mea­sure of their net value, while Mor­gan Stan­ley’s trade at about their book value.

Lofty goal

In ad­di­tion to fee in­come, bank­ing prod­ucts of­fer more de­posit fund­ing for Mor­gan Stan­ley, which reg­u­la­tors view pos­i­tively. Dur­ing a fi­nan­cial cri­sis de­pos­i­tors are less likely than cor­po­rate bond in­vestors and other lenders to flee when trou­ble is brew­ing in mar­kets or at a bank. When rates rise, de­posit fund­ing is of­ten cheaper than other forms of bor­row­ing. Mor­gan Stan­ley now has around $139 bil­lion of de­posits in its bank unit and is aim­ing to get up to $200 bil­lion in the next sev­eral years. To help its ef­fort, it has as­sem­bled a team of card and pay­ment ex­ec­u­tives, many of who led sim­i­lar busi­nesses at Mer­rill Lynch. Tom Duffy, who heads bank­ing ser­vices within wealth man­age­ment, says his prod­uct de­vel­op­ment team has more than dou­bled to around 34 since he joined the bank in 2011. Mor­gan Stan­ley’s over­all de­posits, at around $147 bil­lion, fund a much smaller por­tion of its bal­ance sheet than most other banks - its de­posits equal about 18 per­cent of as­sets, com­pared with more than 50 per­cent for both JPMor­gan Chase and Bank of Amer­ica. Win­ning more client as­sets may not be easy, an­a­lysts noted.

“It’s a lofty goal to be the pri­mary bank for ev­ery one of their wealth man­age­ment clients,” said Glenn Schorr, an an­a­lyst with Ever­core ISI. But even if the bank wins just a sliver of busi­ness from cus­tomers, Mor­gan Stan­ley will be bet­ter off, he said. Some fi­nan­cial ad­vis­ers also ques­tion whether they will be able to push their clients, who may pre­fer to con­duct their ev­ery­day bank­ing at a tra­di­tional bank branch, into chang­ing their daily be­hav­ior. “Five or six years ago, the whole bank­ing ef­fort at Mor­gan Stan­ley was very em­bry­onic - we were play­ing catch up in the space,” said Greg Flem­ing, Mor­gan Stan­ley’s pres­i­dent of wealth man­age­ment. “We’ve been gear­ing up for this over the last few years and build­ing out our tech­nol­ogy, which is why this is more of a 2016 ini­tia­tive.”

Re­tail bank­ing

The tech­nol­ogy Flem­ing re­ferred to in­cludes on-line bank­ing and mo­bile bank­ing soft­ware. Boost­ing re­tail bank­ing prod­ucts will help to ex­pand wealth man­age­ment’s profit mar­gins. Last quar­ter, the pre-tax mar­gin in the wealth busi­ness rose to 23 per­cent, at the lower end of the bank’s long-term goals, and in line with Bank of Amer­ica’s wealth unit over the same pe­riod. In ad­di­tion to adding ex­ec­u­tives to Duffy’s prod­uct de­vel­op­ment team, Mor­gan Stan­ley hired eight cash man­age­ment spe­cial­ists and sent them to 60 wealth man­age­ment of­fices around the coun­try ear­lier this year to train fi­nan­cial ad­vi­sors and their sup­port staff about the firm’s dif­fer­ent cash man­age­ment prod­ucts. — Reuters

NEW YORK: Photo shows the New York Stock Ex­change. Global stock mar­kets were mostly higher yes­ter­day, as in­vestors looked past last week’s at­tacks in Paris. — AP

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