Lackluster markets weigh on Morgan Stanley

MORGAN STANLEY’S trouble growing revenue in weak markets may cause management to take further actions to achieve its financial goals, Chief Executive James Gorman said on Monday.

The Wall Street bank’s firstquarter profit tumbled by more than half, as trouble in fixedincome markets hurt its trading business and capital markets underwriting lagged.

Sliding commodity and oil prices, worries about the Chinese economy and uncertainty about US interest rates scared off traders, investors and companies hoping to issue debt or list on stock exchanges early in the quarter.

Morgan Stanley’s return- onequity, a key measure of how well it uses shareholder capital to earn profits, was 6.2%, well below Gorman’s goal of 9 to 11% by the end of next year.

“It must be said that if these markets were to continue as is, our goals would be extremely difficult to achieve and we would therefore take additional appropriate actions,” Gorman said on a conference call with analysts on Monday.

He added that Morgan Stanley’s shareholder return was “not acceptable.”

Analysts were initially bullish on Morgan Stanley’s results, because it beat their subdued expectations by a wide margin. But as the call went on, Gorman and Chief Financial Officer Jon Pruzan were hammered with questions about how it will achieve its financial goals if market conditions do not improve.

Stephen Biggar, an analyst at Argus Research, said it would be “very difficult” for Morgan Stanley to achieve the return-onequity target Gorman has set out with revenue as weak as it was last quarter.

CHANGING FOCUS

Morgan Stanley and its peers have increasingly focused on expenses to make up for weak revenue.

The bank said in January it was looking to save up to $ 1 billion by 2017 through technology and moving jobs to less expensive locations. Overall, it cut expenses by 14% during the first quarter.

In an interview, Pruzan told Reuters most of the cost-cutting last quarter came from “tightening up discretionary spending.” More cuts are on the way, but it will take time for them to be reflected in earnings, he said.

The bank also plans to move more back-office staff to low-cost locations.

About 40% of Morgan Stanley’s back-office employees currently sit in lower-cost locations. Pruzan said the bank would like to increase this to 50 to 55%.

“There are areas that are starting to take shape but we’ll see the actual savings from those towards the end of the year and next year.”

Overall, Morgan Stanley’s earnings applicable to common shareholders fell 54.4% to $1.06 billion, or 55 cents per share, from a year earlier, when the bank reported its most profitable quarter since the financial crisis.

Net revenue fell 21.3% to $7.79 billion, missing the average estimate of $7.87 billion.

The bank’s adjusted revenue from fixed income and commodities trading slid 54.1% in the quarter. Equities trading revenue fell 9.3%. Wealth management revenue fell 4.3% to $3.67 billion during the quarter, but this accounted for 47% of net revenue compared with 39% in the same period of 2015. —