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WIKI ANALYSIS
Morgan Stanley (NYSE:MS) is a U.S. bank holding company and the seventh largest global asset management firm in terms of assets under management with $522 billion.[1] Morgan Stanley advises large, institutional clients on how to structure and execute transactions, including mergers and acquisitions, and helps them with debt and equity issuance. Additionally, Morgan Stanley offers trading services and manages assets for institutions and wealthy individuals.
In 2010, MS reported an income of $4.5 billion for the year compared to $1.3 billion in 2009. Net revenues were $31.6 billion for the year compared with $23.4 billion a year ago.
Business Segments
Institutional Securities (67.2% of Net Revenue) [2]
Morgan Stanley's Institutional Securities group was the most profitable segment of its business plan in 2010. Institutional Securities incorporates several different businesses including Investment Banking and Sales and Trading. The segment provides financial advisory and capital raising services primarily through wholly owned subsidiaries that include Morgan Stanley & Co Inc., Morgan Stanley & Co International plc, Morgan Stanley Japan Securities Co., Ltd and Morgan Stanley Asia Limited. The segment also conducts sales and trading activities worldwide, as principal and agent, and provide related financing services on behalf of institutional investors.
Investment Banking and Corporate Lending
Morgan Stanley's Investment banking provides corporate and institutional clients globally with advisory services on key strategic matters, such as mergers & acquisitions, divestures, joint ventures, corporate restructurings, recapitalizations, spin-offs, exchange offers and leverage buyouts and takeover defenses as well as shareholder relations. Its capital raising activities involve participating in public offerings and private placements of debt, equity and other securities worldwide. Its corporate lending activities including providing loans or lending commitments, including bridge financing, which involve providing capital on a short-term basis to a company prior to its going public or its next major private equity transaction.
Sales and Trading Activities
Morgan Stanley conducts sale, trading, financing and market making activities on securities and futures exchanges and over-the-counter (OTC) markets around the world. Its sales and trading activities include Equity Trading, Interest Rates, Credit and Currencies, Commodities and Clients and Services. The banks is also a leader in electronic trading. Electronic trading involves using computers to conduct trades rather than involving human agents. It also carries significantly lower margins.
Global Wealth Management (28.4% of Net Revenue)[2]
This subset of Morgan Stanley focuses on providing advising services on investing and wealth planning, provides services for retirees, and offers insurance, credit, and other money lending products. It provides advising services to individuals and smaller businesses, however, its emphasis is on ultra high net worth and affluent investors.
Asset Management (5.2% of Net Revenue)[2]
Morgan Stanley's asset management services large institutions such as pension funds. [3] To combat trends of asset outflows the business has appointed new managers in addition to bringing on new talent in the lower ranks. Morgan Stanley's alternative investments platform includes hedge funds, funds of hedge funds, funds of private equity fund and portable alpha strategies, including FrontPoint Partners LLC, a leading provide of absolute return strategies. The platform also includes minority stakes in Lansdowne Partners, Avenue Capital Groupe and Traxis Partners LP. Morgan Stanley's Merchange Banking Division includes the bank's real estate investing business, private equity funds and infrastructure investing group. Morgan Stanley typically acts as a general partner of and investment adviser to, its alternative investment and merchant banking funds.[4]
Morgan Stanley is one of the first few major banks which has divested its private equity operations in the US and moved the business to China, creating an opportunity for the bank to launch a new line of yuan-denominated private equity funds in the country. [5]
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Trends and Forces
Interest Rates
Rising interest rates raise the cost of borrowing for all lenders, dampening the overall demand for mortgages and other home loan products. The U.S. Federal Funds Rate could help to stimulate demand for loans and lower default rates by allowing people to refinance their homes at lower rates.[6][7]
Benefits of Changes in Tax Law
Rising corporate income tax rates directly increase costs for taxes paid to the government, which decreases the amount of profits left for banks to fund investments and reinvest in operations. However, changes in tax law can also benefit banks. Proposed fiscal legislative reform which would effectively increase the capital gains tax paid by private equity firms and other money managers could increase the rate of IPOs in the short term. The rise in IPOs would be a result of money managers and PE firms attempting to avoid an increase in capital gains tax.[8]
Housing Market
Investment banks, particularly those with significant mortgage securitization practices, are very sensitive to the residential real estate market. Mortgage-backed securitization (MBS) is the bundling of mortgages for sale to third parties. When the housing market goes down, the value of the underlying mortgages backing these securities falls as well. Moreover, the overall number of mortgages also decreases.
Housing loans have traditionally been a strong source of revenue for banking firms. With the current interest rate environment, owners of real estate are selling to take advantage of the high short-term rates. With low interest rates in the future, prospective home owners are staying out of the market and waiting for short-term rates to drop before looking for a loan. This over-arching attitude has weakened the housing loans business for banks, such as Morgan Stanley.
Emerging Markets
International expansion is a leading driver of investment banking and trading business. This expansion has occurred in a number of ways. Part of the growth is driven by private equity, US company expansion, and the growth of capital markets in developing countries. Also, demand for access to foreign stock markets has risen.[9]
US companies often seek to expand their presences in other countries through acquisitions, leading to advisory fees for investment banks. Likewise, private equity companies are increasingly looking for international opportunities and require investment banks to take their acquisitions public. Finally, demand for capital and thus investment banking services, in developing countries like Brazil, China and India has increased exponentially over the last year and is expected to continue to grow for the foreseeable future. In particular, Morgan Stanley has increased its operations in China and made strategic investments.[10]
Government Regulation
An increase in US Government regulation could have a substantial impact on the operations of Morgan Stanley as well as the rest of the financial industry. Depending on the wording and interpretation of the regulation, the impact could include Morgan Stanley's proprietary trading, hedge fund and private equity investments, and change the company money holding directly[11] Additional or increased regulation can cause the bank to alter its operation or cause it to pay fines directly.
All holding banks will be prevented from engaging in proprietary trading and in any trades where there is a "material conflict of interest". In addition, "material exposure to high-risk assets or high-risk trading strategies" will be banned. While it is unclear what will be outlawed in the second two clauses, proprietary trading makes up a substantial portion Morgan Stanley's annual revenue. While the impact may be large, the true extent depends on the interpretation and implementation of the regulation.[12]
The Basel III rules will force banks to increase the amount of money they hold against liabilities. While the goal of the regulation is to prevent banks from becoming over leveraged, they may also prevent the banks from creating the same profit margins that they previously were able to attain.[13]
Other regulation may place limits on the extent to which banks may invest in hedge funds or in private equity funds. This is commonly referred to as the Volcker Rule.[14] In order to improve their returns, Morgan Stanley, like many of its peers, invests in organizations like hedge funds and private equity funds. These funds tend to have higher returns, but also tend to be higher risk. While the regulation aims to lower speculation and high risk investments, it may also prevent Morgan Stanley from achieving the returns it has historically gotten. Swaps, which are used by banks to offset their risk or hedge against potential outcomes, may also be regulated. This would prevent banks from taking certain positions because the risk would be too high without the possibility of a swap.[15] [16]
Furthermore, regulation imposing a fee to financial institutions that keep their money in the Federal Reserve would increase the cost of operation for Morgan Stanley.[17][18][19]
Competition
Morgan Stanley's primary competitor is Goldman Sachs Group (GS). Two the firms competed intensely as two of the premiere Investment Banks in the industry.[20] The firm also has strong positions in both debt and equity underwriting. It's primary competitors are Goldman Sachs Group (Gs), and J P Morgan Chase (JPM).
References
- ↑ Bank of America Topples UBS as World Wealth Manager, CNBC July 6, 2009
- ↑ 2.0 2.1 2.2 MS 10-K 2009 Item 6. "Selected Financial Data" p.34
- ↑
- ↑ Reuters "Invesco Ltd. Completes Acquisition Of Morgan Stanley's Retail Asset Management Business" June 1, 2010
- ↑ Reuters "Morgan Stanley to set up China PE headquarters in Hangzhou" 12/2/10
- ↑ Bloomberg.com, US Rates and Funds
- ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
- ↑ Huliq "US tax law changes in 2011 increase private equity deals" 18 Jan 2010
- ↑ Morgan Stanley says first in Saudi swap agreement | Reuters.com
- ↑ "JPMorgan Chase & Co., Morgan Stanley Receive Approval For Their Chinese Domestic Securities Businesses" 1/6/11
- ↑ The Washington Post "Financial regulation bill nears finish line with support from Snowe, Brown" 13 July 2010
- ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 2
- ↑ The Huffington Post "Basel III Rules: Banks Given Until 2019 To Fully Comply With New Global Regulations" 9/13/10
- ↑ Business Insider "Morgan Stanley Will Take Huge Loss On FrontPoint Because It's Bleeding Money On Losses And Lobsters" 8/5/10
- ↑ Forbes 'Swaps Split Could Cost Banks $85 Billion In Capital'
- ↑ The Options Insider "Permissible Bank Derivatives Trading" 2010
- ↑ The Boston Globe "Brown will back financial overhaul" 13 July 2010
- ↑ Market Watch "New regulations may cut big bank profit 13%, Goldman says" 28 June 2010 pg. 1
- ↑ Financial Feed "Vague Business Tax Cuts for the New Tax Law" 12/27/10
- ↑ Bloomberg "Morgan Stanley's Kelleher Says 'Resurgent' M&A Possible in 2010" 10 Nov 2009
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