Morgan Stanley lending business shines amid gloomy overall results

[NEW YORK] Morgan Stanley's multiyear effort to build up its wealth management arm's lending business began to pay off on Monday as the unit emerged as one of the few bright spots in the bank's generally bleak quarterly earnings.

The New York-based bank said profit in its wealth management group rose 6 per cent, helped by a 25 per cent increase in net interest income, a measure of lending income. That growth stood in stark contrast with slides in bond trading, investment banking and investment management.

The net interest income increase stemmed from growth in the bank's loan book, which rose 33 per cent during the third quarter from the same period last year.

In the last several years, Morgan Stanley has hired hundreds of bankers, underwriters, and back-office staff to help it write more mortgages and specialized loans. It has revamped its compensation structure to encourage its brokers to make loans, and has marketed its offerings more aggressively with clients.

The effort is one part of Morgan Stanley's broad campaign to make itself safer after coming uncomfortably close to failing during the financial crisis. The bank spent billions of dollars buying the Smith Barney retail brokerage business from Citigroup between 2009 and 2013, and combining it with its own wealth management unit.

Morgan Stanley's efforts to ramp up lending underscores how since the financial crisis, investment banks have made themselves more and more like universal banks by increasing their retail and commercial banking activities. Even Goldman Sachs Group Inc, which is clinging to its traditional investment banking focus, has agreed to acquire GE Capital's online deposit business.

Morgan Stanley's executives often trumpet the relatively stable earnings that wealth management offers, as opposed to a business like trading, where revenue can plunge in any given quarter. In the third quarter, for example, excluding accounting adjustments linked to the values of the bank's own debt, bond trading revenue fell 42 per cent to US$583 million.

Lending, which comprises mortgages as well as securities-based lending in which clients can borrow against their own portfolios, is a key part of that shift. At Morgan Stanley, interest income from loans in wealth management was about a fifth of total revenue for the unit, and it helped lift the business's pre-tax profit margin to 23 per cent, up 2 percentage points from the same quarter last year.

Brian Kleinhanzl, an analyst with KBW, said Morgan Stanley may see an increase in earnings through its loan strategy, but cautioned that it is not devoid of risk. "There is upside, but it has to be done in a manner that is prudent," he said.

Morgan Stanley has said the average credit score for its mortgage customers is around 750, well into the "prime" borrower category, and the bank has had just one credit loss out of over 20,000 individual loans, CEO James Gorman said on the company's earnings call.

The bank's loan book has considerably more room to grow, executives told Reuters. Morgan Stanley loans out around 55 per cent of its deposits, well below the roughly 80 per cent that large commercial banks lend. Just 1.8 per cent of its clients had a mortgage with the bank, and just 14 per cent have a securities-based or tailored loans.

The bank ended the quarter with US$139 billion in deposits, up from US$132 billion in the second quarter. Loans and lending commitments within wealth management rose to US$52.3 billion by the end of the quarter.

REUTERS