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Trading Operations Give Morgan Stanley's Results The Much Needed Leg-Up
7/22/2013 4:07:00 PM
Morgan Stanley ( MS ) seems to have finally got its business model working the way it has been aiming for these last few years, with the global investment banking giant reporting pre-tax income of $1.8 billion - making Q2 2013 its best quarter by this measure since Q2 2011. Although a chunk of this gain came from the much better-than-expected performance by the bank's equity trading desk which roped in $1.8 billion in revenues this quarter (adjusted for a debt revaluation gain of $114 million), each of the bank's operating units did their part to contribute positively towards the bottom-line figure.
Quite notably, the wealth management business continues its growth momentum, with margins reaching 18.5% for this quarter after yet another record-breaking display by the business. And the bank also leveraged its strong position in the global advisory and underwriting industry to pocket some handsome fee revenues.
And in what came as a welcome surprise, the bank also announced its decision to buy back shares worth $500 million making this the first time in years the investment bank will return a sizeable amount of cash to shareholders.
We have revised our price estimate for Morgan Stanley's stock upwards from $24 to $28 to factor in the impact of the decision to buy back shares as well as of the growing earning potential of the wealth management business on the bank's total value.
The Wealth Management Business Continues To Deliver
Morgan Stanley's struggle to eke out profits from its super-sized wealth management business is no secret, with the bank unable to break the trend of single-digit margin figures for two long years. But the bank stuck to its decision to completely buy out Citigroup's stake in the Smith Barney operations, with this being the focus of its capital plan each year.
Having achieved the self-imposed 17%-margin target for the business well before the 2014 deadline in Q4 2012, Morgan Stanley upped the ante this time with a margin figure of 18.5% making this is the most profitable quarter ever for the world's largest brokerage. And it could not have come at a better time, considering the fact that the bank also received all regulatory clearance to acquire the final chunk of the erstwhile Smith Barney business a few weeks ago.
Equity Trading Unit Steps In To Make Up For Declining Fixed-Income Focus
In its single-minded focus to ensure a steady source of revenues through its wealth management business, Morgan Stanley kept its money-minting trading operations in the back burner for several quarters - as is evident from the fact that the bank performed the worst among all U.S. investment banking giants in the trading arena over the recent quarters.
But this changed noticeably in Q2 2013, with total revenues from trading reaching $2.9 billion for the quarter (adjusted for debt revaluation gains). And while the decline in fixed-income trading revenues was expected given the swoon in global debt markets towards the end of the quarter as well as from Morgan Stanley's conscious decision to scale down these operations (see Morgan Stanley Cuts Its Fixed Income Targets As Focus Shifts), the fact that equity trading revenues more than made up for the decline is a good sign for Morgan Stanley's overall business model in the long run.
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