Morgan Stanley: double trouble

Welcome to the double-digit club, Morgan Stanley. The bank - the last of the big Wall Street names to report first-quarter earnings - announced strong results on Monday. Earnings per share of $1.14 came in well ahead of the 78c that analysts had predicted. Those profits were good enough to push the much-scrutinised return on equity figure up to a formidable - at least in this era - 10 per cent. This was the best ROE number since 2007.

How did Morgan Stanley get to the mystical threshold? The firm would emphasise its wealth management business. Its army of nearly 16,000 advisers and brokers generated $4bn in revenue, good enough for a profit margin of 22 per cent. In 2007, the wealth unit had a margin of just 15 per cent on revenue less than half of today's level. The strategy in wealth management has been to favour management fees over commissions, use analytics to create a better experience for clients, and then to grow deposits and lending.

Corporate deal advice was also strong, jumping 40 per cent to nearly $500m (although Morgan Stanley's chief rival Goldman Sachs last week reported first-quarter M&A revenue of twice that).

Still, the impact of trading revenue cannot be dismissed and it raises questions about the sustainability of that 10 per cent ROE. Revenue from equity trading jumped 31 per cent this quarter. The good news, at least from a risk management perspective, is that the growth in the more volatile fixed income, commodity and currency trading was only half of that, reaching just below $2bn of revenue. In 2007, that business generated $3.6bn, and FICC was nearly twice the size equity trading in terms of revenue. Today they are roughly balanced.

Even after Morgan Stanley shares inched up 1 per cent on Monday, they are down 4 per cent for the year to date. One quarter of double-digit ROE is a good start but no more than that. The market is right to wait for more of the same.

Email the Lex team at [email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation