Morgan Stanley gets most relief from first quarter

April 17, 2014

By Antony Currie

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Few banks have reported much to crow about in their first-quarter earnings. But Morgan Stanley can claim relief, at least, from the $1.45 billion in net income it unveiled on Thursday. Chief Executive James Gorman presided over a far better start to the year than in 2013, including bucking the Wall Street trend in fixed-income trading. More importantly, Gorman looks closer to hitting targets than rivals like Bank of America and Citigroup.

Even so, Morgan Stanley’s showing was not as good as Goldman Sachs managed. The bank run by Lloyd Blankfein earned an annualized return on equity of 10.9 percent in the quarter, compared with 8.9 percent at Gorman’s shop – though Goldman relied on some $500 million more in investment gains than Citi analysts had expected. Morgan Stanley’s ROE is therefore still running shy of the 10 percent seen as a decent proxy for banks’ cost of capital. But momentum seems to be building toward that goal.

In one illustration of this, Morgan Stanley’s fixed-income, currency and commodities unit cranked out a 35 percent increase in its top line from the first quarter last year. BofA eked out a 2 percent increase, while Citi, JPMorgan and Goldman were down between 11 percent and 21 percent. The equities trading unit also had a good quarter, with its $1.7 billion of revenue just besting Goldman’s showing for the second time in three periods.

The real juice for Gorman, though, comes from the bank’s two less capital-intensive businesses. Wealth management kept a recent trend going with a 19 percent pre-tax margin, just less than longer-term targets. Investment management, meanwhile, blasted out a 36 percent pre-tax margin, putting Morgan Stanley in the same league as market leaders like BlackRock.

The CEO was excited enough to tell investors that the earnings power of these two businesses alone could justify doubling or even tripling the bank’s dividend – were the Federal Reserve to allow it. That won’t happen any time soon. But with better core earnings and much less of the legal and regulatory trouble that has whacked BofA and Citi, Gorman can, for the first time in a while, breathe a lot more easily.

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