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WIKI ANALYSIS
Morgan Stanley (NYSE:MS) is a U.S. bank holding company and an asset manager. 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.
Many of the firm's mortgages and mortgage-backed securities have seen their values plunge, resulting in write-downs and write-offs totaling $10.8 billion in 2007 and as of July 22, 2009, it has posted three straight quarterly losses. The significant decline of its assets prompted it to become a Bank holding company on September 21, 2008. The new status allows the company to run commercial banking operations and gives its depositors insurance through Federal Deposit Insurance Corporation (FDIC). From a strategic perspective, Morgan Stanley can use deposits to reduce its leverage. In addition, Morgan Stanley received $10b in government TARP funds and was required to raise an additional $1.8b after taking the "Stress Test" in February. Since then, has raised money through the sale of common stock and assets and was the first financial institution to repay its TARP loan in June 2009.
Business Segments
Institutional Securities
Morgan Stanley's Institutional Securities group was the most profitable segment of its business plan in 2008. Institutional Securities incorporates several different businesses including Investment Banking and Trading. The Investment banking business advises companies on potential transaction, in the areas of valuation and deal structuring. This division also underwrites (guarantees the sale of) new debt and equity issues.
Investment Banking
Morgan Stanley's Investment banking has suffered a few set backs in the last year, due largely to the loss of talent. With the management shuffle complete and aggressive recruiting efforts well underway the expectation is that this business should prove relatively stable going forward.
Global Capital Markets
Morgan Stanley is a leader in electronic trading. Electronic trading involves using computers to conduct trades rather than involving human agents. It is in many ways more efficient than regular trading. It also carries significantly lower margins.
Global Wealth Management
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, but focuses on its wealthier customers. In fact, 69% of its individual clients are households with more than $1 million.
Asset Management
Morgan Stanley's asset management services large institutions such as pension funds. In recent years this division has struggled as has seen significant asset outflows. To combat these trends the business has recently appointed new management in addition to bringing on new talent in the lower ranks. Additionally, it is pouring more resources into its Alternative Investments -typically higher risk higher return investments- and private equity offerings, two areas in which it has traditionally under invested.
Morgan Stanley-Smith Barney
In January 2009, Morgan Stanley purchased Citi's Wealth Management business Smith-Barney for $2.7 billion in cash and a 51% stake of the venture.[2] The business will be the world's largest wealth management business, with over 18,000 financial advisors, $1.7 trillion in client assets, $14.9 billion in pro-forma revenues, and $2.8 billion in pro-forma pre-tax profit.[3] MS Chairman and CEO John Mack stated that the move is an "important step forward in our effort to build our wealth management franchise, which will be an increasingly important and profitable part of Morgan Stanley's business."[3] The move is forecast to save both firms $1.1 billion.[3] MS and C, who have seen their investment banking segments drop monumentally due to the 2008 Financial Crisis, have invested in wealth management to hedge losses from other areas.
Trends and Forces
Transformation into a bank holding company helps reduce bankruptcy risk
The risky mortgages and leveraged lending that were responsible for much of Morgan Stanley's growth since 2005 collapsed in 2007 resulting in more than $10b in losses. And, as asset prices, especially prices of mortgage-based securities started to plunge, it increased the risk that the bank would default on its debt obligations and could declare bankruptcy. In 2008, Morgan Stanley came under intense pressure to increase its equity base because of its high leverage ratio. Although investment banks typically operate at a higher leverage ratio than commercial banks, MS's was dangerously high. In September 2008, Morgan Stanley held $1 in equity for every $34 in assets, the remaining assets were supported by leverage, or borrowed money.
On September 21, 2008, Morgan Stanley became a bank holding company, which allows it to run commercial banking operations and gives its depositors insurance backed by the Federal Deposit Insurance Corporation (FDIC). Morgan Stanley has 3 million retail brokerage clients, with $36 billion in deposits, which amounted to about 4% of the firm's liabilities, which it uses to reduce its leverage and risk. This amount is a lot smaller than deposits at traditional commercial banks, whose deposits can account for 40% to 60% of liabilities.[4] Morgan Stanley will continue to expand its retail banking operations and consumer deposits.[5]
By becoming a bank holding company, Morgan Stanley has allowed itself to be placed under more oversight from the Federal Reserve than it had been in the past. Though the exact impact of this transition on the bank's profitability is unclear, analysts believe that limitations on high-risk proprietary trading will hurt the Morgan Stanley's operating margin.[6]
Stress Test & the Repayment of TARP Funds
In February, the nation's 19 largest banks with more than $100 billion in assets were required to participate in a "stress test" -- a series of financial assessments to determine the health of the bank and if it needs additional capital.[7] The Fed's criteria for the Stress Test included measures such as, GDP, unemployment rates, and housing prices. In May 2009, the government determined that in addition to the $10 billion in Troubled Assets Relief Program (TARP) funds the government had given MS since October 2008, Morgan Stanley needed to raise additional $1.8 billion.[8] This was a relatively small amount compared to the $34 b Bank of America had to raise, and MS ranked 5th in the amount it capital it had a raise.[9]
Morgan Stanley was considered to be the first bank to repay its TARP money on June 17, 2009.[10] It raised $7.6 billion through the sale of common stock and assets.
Macroeconomic Factors
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. The Fed has been consistently lowering rates since 2007. For example, in July 2009 it was 0.5%, compared to 2% in July 2008 and 5.25% in September 2007.[11][12]
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. Since 2004, firms like Morgan Stanley have seen its international revenues grow at 2-5 times the pace of its US revenues. Morgan Stanley's US revenue grew at a compound annual growth rate of 3% versus 14% for international. This 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; on August 25, 2008, Morgan Stanley announced that it was the first major investment bank to enter into a "swap agreement" letting foreign investors buy stock on the Saudi stock exchange.[13]
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.
Competition
Morgan Stanley significant strides in restructuring its Global Wealth Division but still lags behind Merrill Lynch and Citigroup among all of the relevant metrics. As James Gorman continues to whip the organization into shape, Morgan Stanley may continue see increased gains against its competitors. That said it will be an uphill battle as Morgan Stanley has the smallest advisor force of the three and attracting new clients in the private wealth industry tends to be an expensive process. To a lesser extent the firm also competes with smaller players like Lazard (LAZ) and Jefferies Group (JEF).
Morgan Stanley is number one in equity trading revenue. This is due in part to its leadership in electronic trading. Its primary competitor in this area is Goldman Sachs Group (GS). The firm also has strong positions in both debt and equity underwriting. It's primary competitors are Goldman, Merrill Lynch (MER) and J P Morgan Chase (JPM) While its performance has suffered over the past 2 years as a result of management turmoil, one would expect to see improved performance going forward subject to market conditions.
References
- ↑ Google Finance: MS
- ↑ IT Business Net, "Morgan Stanley and Citi to form joint venture," 1/13/09
- ↑ 3.0 3.1 3.2 Middle East North Africa Financial Network, "Morgan Stanley and City form joint venture," 1/14/09
- ↑ Bloomberg.com, Retrieved September 23, 2008
- ↑ Financial Express, Retrieved September 23, 2008
- ↑ Wall Street Journal, retrieved September 22, 2008
- ↑ Board of Governors of the Federal Reserve System, "The Supervisory Capital Assessment Program:Design and Implementation," 04/24/09
- ↑ Time, "Does Morgan Stanley Deserve to Be Free of TARP?," Stephen Gandel, 06/11/2009
- ↑ MSNBC "Ten of the largest U.S. banks need $75 billion," 05/08/2009
- ↑ Market Watch "J.P. Morgan, Goldman, Morgan Stanley, others repay TARP," Alistair Barr, 06/17/2009
- ↑ Bloomberg.com, US Rates and Funds
- ↑ Federal Reserve Board "Open Market Operations" 16 Dec 2008
- ↑ Morgan Stanley says first in Saudi swap agreement | Reuters.com
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