Vladimir Estragon Gorman
Morgan Stanley is already waiting for this year’s Godot. The Wall Street firm earned $1.1 billion in the first three months of the year. While that beat estimates, it amounts to an annualized return on equity of just 6.2 percent, well short of the 10 percent target that Chief Executive James Gorman set long ago but still hasn’t managed to hit in any full year’s earnings since. Given the first-quarter showing, he’s unlikely to get there in 2016 either.
The three months to March are usually the best of the year for investment banks. Morgan Stanley, for example, made almost a third of its net income in the same period last year. It’s usually when fixed-income trading performs well, too. The less that capital-intensive business brings in, the harder it will probably be to make up returns over the following nine months. Gorman’s traders pulled in just $839 million last quarter, a 59 percent drop from the same period a year earlier – and the weakest performance so far for any of the big players.
One lever Gorman hopes to pull is giving more capital back to shareholders. Morgan Stanley has, on paper, a surfeit of capital: its Tier 1 common equity ratio of 14.5 percent is way above the 10 percent minimum it needs to hold by 2019.
Even were the Federal Reserve to let Gorman hand all the excess back to investors – and it’s highly unlikely he’d even ask – the bank’s annualized return on equity last quarter would, at 8.4 percent, still fall short of his goal.
Cutting costs would help but alone couldn’t bridge the gap. Morgan Stanley, after all, let 1,200 employees go in December, yet results remain subpar.
That puts the onus on growing the top line. Gorman sensibly expects the wealth-management division to do the heavy lifting. It requires less capital than trading, so can deliver a bigger bang for the buck. Its pre-tax margin is decent, and its banking unit offers a way to boost income, especially as interest rates rise.
Trouble is, the Fed is taking its time hiking rates, and tricky markets hurt wealth management as well as underwriting and trading. Meanwhile, the firm’s low and volatile trading results often more than offset any gains. All in, that leaves growth a long way off.