Mor­gan Stan­ley hits CEO's bond trad­ing tar­get, sur­pris­ing an­a­lysts

The Pak Banker - - FRONT PAGE -

Mor­gan Stan­ley, which has strug­gled for years to im­prove its bond-trad­ing busi­ness, may fi­nally be turn­ing the cor­ner. The Wall Street bank re­ported a lower sec­ond-quar­ter profit on Wed­nes­day, but beat ex­pec­ta­tions by de­liv­er­ing rel­a­tively strong bond-trad­ing rev­enue and cut­ting ex­penses.

Chief Ex­ec­u­tive James Gor­man has faced tough ques­tions from an­a­lysts about the state of its fixed in­come, cur­rency and com­modi­ties trad­ing unit since tak­ing the helm of the bank in 2010. Mor­gan Stan­ley scaled back the busi­ness in an ef­fort to make it more prof­itable, but its choppy rev­enue led some to won­der whether the bank was on the right course.

But so far this year, the busi­ness is hitting a rev­enue tar­get Gor­man laid out, and many an­a­lysts at­trib­uted Mor­gan Stan­ley's earn­ings beat to the bond trad­ing unit. In dis­cussing re­sults, Gor­man sounded tri­umphant, de­fend­ing his de­ci­sion to main­tain the busi­ness on a smaller scale. "(It's) the topic of the day, the year and the cen­tury, it would ap­pear," he said when asked whether the re­sults were sus­tain­able. "Lis­ten, my view was that there was a gen­eral over-re­ac­tion to the un­der­per­for­mance."

In both quar­ters this year, Mor­gan Stan­ley pro­duced more than the $1 bil­lion per quar­ter in rev­enue from fixed in­come, cur­rency and com­modi­ties (FICC) trad­ing that Gor­man re­cently set out. As part of the re­struc­tur­ing ef­fort, the bank has re­duced head­count there by 25 per­cent, slashed risky as­sets and fo­cused on trans­ac­tions that re­quire lit­tle cap­i­tal un­der new reg­u­la­tions. Gor­man ad­vised an­a­lysts to ex­pect quar­terly fluc­tu­a­tions, but said the tar­get was achiev­able over the long term.

"At the time it al­most sounded like an as­pi­ra­tional goal, but clearly they did well," said Op­pen­heimer an­a­lyst Chris Ko­towski. "Maybe ... we are clos­ing in on a sus­tain­able and pre­dictable level." Mor­gan Stan­ley is also in the midst of a cost-cut­ting pro­gram, tar­get­ing $1 bil­lion by 2017. As part of this ef­fort, the bank cut nonessen­tial travel by half this year, Chief Fi­nan­cial Of­fi­cer Jon Pruzan said. It is also clos­ing data cen­ters and shift­ing em­ploy­ees to lower-cost hubs.

Sec­ond-quar­ter op­er­at­ing ex­penses fell 8.4 per­cent to $6.43 bil­lion. Com­pen­sa­tion costs, its big­gest ex­pense, fell 8.9 per­cent to $4.02 bil­lion. Fol­low­ing the re­sults, Ever­core ISI an­a­lyst Glenn Schorr is­sued a re­port cheek­ily ti­tled "Mor­gan Stan­ley Beats on FICC (not a typo) & Cost Con­trol." Al­though it ex­ceeded ex­pec­ta­tions, Mor­gan Stan­ley is still fall­ing short when it comes to a key mea­sure of how well it's us­ing share­holder money to pro­duce prof­its.

Its re­turn on eq­uity of 8.3 per­cent dur­ing the sec­ond quar­ter is less than the 10 per­cent min­i­mum that many in­vestors ex­pect, and less than Gor­man's stated tar­get of 9 to 11 per­cent by the end of 2017. Over­all, the Wall Street bank's net in­come at­trib­ut­able to com­mon share­hold­ers was $1.43 bil­lion, or 75 cents per share, in the quar­ter ended June 30, com­pared with an ad­just- ed $1.69 bil­lion, or 79 cents per share, a year ear­lier. An­a­lysts on av­er­age had ex­pected earn­ings of 59 cents per share, ac­cord­ing to re­ports. After adopt­ing a new ac­count­ing method, Mor­gan Stan­ley's earn­ings no longer re­flect changes in the value of its own debt. Ad­just­ments for the year-ago pe­riod make the fig­ures com­pa­ra­ble.

Equities sales and trad­ing, typ­i­cally a bright spot for the bank, fell 6 per­cent to $2.1 bil­lion com­pared to the year be­fore. Com­peti­tors in­clud­ing JPMor­gan Chase & Co, Gold­man Sachs Group Inc, Cit­i­group Inc and Bank of Amer­ica Corp also re­ported strong bond trad­ing and weak eq­uity trad­ing rev­enue. Mor­gan Stan­ley's wealth man­age­ment di­vi­sion, which the firm has sought to bulk up over the last few years as a more sta­ble busi­ness than trad­ing, saw net rev­enue fall 2 per­cent to $3.8 bil­lion. Loans and lend­ing com­mit­ments to wealth clients rose 5 per­cent over the prior quar­ter, to $61.3 bil­lion.

Up to Tues­day's close, Mor­gan Stan­ley shares had fallen 11.4 per­cent since the start of the year. Bank stocks have moved higher over the past week on better-than-ex­pected earn­ings. The S&P 500 Fi­nan­cials In­dex is up 1 per­cent since the sec­tor be­gan re­port­ing re­sults on July 14 and up more than 10 per­cent from last month's lows reached after Bri­tain voted to leave the Euro­pean Union.

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