Global investment bank Morgan Stanley (
) announced its positive performance figures for the last quarter
of 2012 Friday, January 18, leading its share prices to soar by
almost 8% over trading that day. ((
Q4 2012 Earnings
, Morgan Stanley Press Releases, Jan 18 2013)) The star performer
for the bank was undoubtedly its Wealth Management business, the
erstwhile Smith Barney unit in which Morgan Stanley increased its
stake to 65% last September (see
Morgan Stanley Smith Barney Gives Way To Morgan Stanley Wealth
), beating expectations by far to churn out its best ever operating
margin of 17% for a pre-tax income of just under $600 million.
Equity trading figures also saw a considerable recovery over the
quarter - another positive for the bank which is keen on downsizing
its fixed-income trading business to free up capital, to comply
with stricter regulatory requirements.
In view of the better than expected performance of Morgan
Stanley's wealth management and institutional securities business
combined with the relaxation in Basel III capital requirements
announced earlier this month (see
Basel Committee Softens Stance, Allows More Asset Classes &
), we have updated our price estimate for Morgan Stanley's
stock from $19 to $24. We explain the main factors behind this
25% upward revision in the bank's stock below.
See our fu
ll analysis of M
Morgan Stanley Wealth Management Breaks Out Of Its
Morgan Stanley has faced considerable difficulty in integrating
its legacy wealth management business with Smith Barney over the
recent years - something evident from the single-digit margin
figures for the unit represented in the chart above. Late last
year, Morgan Stanley CEO James Gorman set a 'mid-teens' operating
margin target for the business by the end of 2013.
But it looks like the efforts that went into aligning the
brokerage with the company's overall business model paid off
earlier than expected with the unit achieving a 17% operating
margin for Q4 2012. In comparison, the margin figure was 7% for Q3
2012 and Q4 2011. A steady increase in revenues along with a steady
decline in expenses are responsible for the marked improvement with
pre-tax income jumping from between $300-$400 million for each
quarter over the last two years to $581 million for Q4 2012.
As there were no extraordinary factors that impacted the revenue
or expense figures for the period, it would be safe to say that the
wealth management business has put its much of problems behind it.
This led us to increase our forecast for the unit's operating
margins over the years to come.
The Announced Job Cuts Will Also Pump Up The Investment
Earlier this month, Morgan Stanley announced its decision to
slash as many as 1,600 jobs across its business with the ax falling
hardest on its fixed income operations (see Morgan Stanley's
Plan To Slash Jobs Comes With Significant Upside). The bank also
made it clear that most of the job cuts will target high-level
employees. As this move implies a reduction in positions that draw
considerable salaries and compensations, it will have a significant
impact on the bank's investment banking margins.
It must be mentioned here that the $4.4 billion accounting
charge for Morgan Stanley for 2012 is responsible for the
investment banking margin figure of -16%, shown in the chart above.
This is in comparison to a $3.7 billion accounting benefit for
2011, from a revaluation of its own debt.
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