Morgan Stanley raises targets, but Wall Street wants more

[BENGALURU] Morgan Stanley raised key profitability and efficiency targets on Thursday, but those loftier goals failed to impress Wall Street analysts, who repeatedly asked chief executive officer James Gorman why the bank could not do even better.

The new targets came after Morgan Stanley reported fourth-quarter results that beat analyst estimates and exceeded Gorman's previously stated ambitions for wealth management, bond trading, expenses and returns on shareholder equity.

During his eight years as CEO, Mr Gorman, 59, has been working to transform Morgan Stanley from a Wall Street firm whose risk-taking nearly capsized it during the 2007-2009 financial crisis into a bank that relies more on businesses that generate steady fees, like wealth management.

The strategic update he laid out on Thursday included annual pretax profit margins of 26 per cent to 28 per cent for wealth management, returns on equity (ROE) of 10 per cent to 13 per cent and a cost-to-revenue ratio of 73 per cent or less in the coming years.

But analysts grilled Mr Gorman about the targets during a conference call to discuss results, arguing that the bank is already at or near those goals and should be able to do much better.

The back and forth took a cheeky turn when Mr Gorman addressed an analyst with an exasperated "Oh my God," before again going through his rationale, including the possibility of a recession hurting profits.

"We are all in on delivering better results than what we've publicly said," Mr Gorman added. "On the other hand, we don't have credibility as a management team if we put out things which are artificially designed to boost confidence."

It was not the first time Wall Street has pushed Mr Gorman to aim higher.

When he took over as CEO, the wealth management business was generating single-digit pretax profit margins. He has gradually lifted the target from mid-teens to 20 per cent to a range of 23 per cent to 25 per cent before outlining the current goal, and each time analysts have asked for more.

Last quarter, Mr Gorman was also quizzed about his view that bond traders needed to generate at least US$1 billion in average quarterly revenue to sustain the business. Some analysts have said that while the figure represents a minimum rather than a goal, the business can do a lot better.

In an analyst note, Devin Ryan at JMP Securities wrote that they have had conversations with investors for years who were hesitant to believe that ROEs could move back into the double-digit range.

"Therefore, we do view these new targets as an important moment for the firm in its current form", adding that he does not perceive the targets to be end points, particularly as wealth management earnings should continue to expand.

Despite the sometimes exasperated discussion, Morgan Stanley's stock price hit its highest level in a decade on Thursday before closing up nearly 1 percent at US$55.84.

With a market capitalisation of US$101 billion, the sixth-largest US bank by assets is now more valuable than its closest competitor, Goldman Sachs Group, whose shares are worth US$95 billion.

Morgan Stanley's adjusted fourth-quarter profit of US$1.68 billion, or 84 US cents per share, beat analysts' average estimate of 77 US cents per share, according to Thomson Reuters.

Those figures exclude a US$1.2 billion charge resulting from a US tax overhaul signed into law in December that also caused one-time hits at other major lenders. Analysts have been looking past those charges to focus on the long-term benefits of lower tax rates.

Morgan Stanley expects its tax rate to fall to a range of 22 per cent to 25 per cent this year, down from 31 per cent last year.

Total revenue rose 5 per cent to US$9.5 billion from US$9.02 billion in the year-ago quarter. Analysts were expecting US$9.2 billion.

Excluding the tax charge, its return on equity was 9.4 per cent last year, within Mr Gorman's 9 per cent to 11 per cent target.

Wealth Helps Drive Results

Wealth management was a bright spot, with revenue rising 10 per cent from the year-ago quarter to a record US$4.4 billion. Its pretax profit margin of 26 per cent topped Mr Gorman's previous target for the business, and the bank gathered a record US$20.9 billion worth of fee-based client assets, the type it is trying to grow.

Morgan Stanley's underwriting business also posted strong results, particularly in equities, helped by the bank's leading position in initial public offerings. Underwriting revenue rose 42 per cent to US$915 million.

And while bond trading revenue plunged 45 per cent in the fourth quarter, the business still delivered more than US$1 billion in average quarterly revenue for the full year.

All Wall Street banks, particularly Goldman Sachs, have faced big declines in bond trading due to historically low market volatility.

BLOOMBERG