Morgan Stanley Says Fixed-Income Reduction to Deepen

Morgan Stanley, which announced in July that it planned to shrink its fixed-income trading business amid new capital rules, said today that the reduction will be bigger than previously forecast.

Morgan Stanley plans to cut the unit’s risk-weighted assets under Basel III rules by at least 35 percent from the third quarter of 2011 through the end of 2014, Chief Financial Officer Ruth Porat said at an investor conference. Chief Executive Officer James Gorman said in July that the reduction would be at least 30 percent, prompting analysts including Goldman Sachs Group Inc.’s Richard Ramsden to call for a bigger cut.

Fixed-income and commodities accounted for $320 billion of the $500 billion risk-weighted assets as of June 30, Porat said, providing those figures for the first time. Porat said that the firm could cut RWAs from the fixed-income division to $255 billion by the end of 2014 without drastically reducing revenue or alienating clients.

“We’re very confident there is upside beyond the plan summarized here while continuing to invest in these businesses to maintain a vibrant, profitable, and client-focused fixed-income business,” said Porat, 54.

Morgan Stanley’s securitized products business, which includes mortgage securities, provides an example of how the firm will shrink the business, Porat said. The group’s quarterly revenue was 8 percent higher in the first half of 2012 than in 2010 and 2011, while it shrank 42 percent on the bank’s balance sheet, according to Porat’s presentation.

The firm did this by cutting distressed holdings and unwinding certain derivatives, Porat said.

Morgan Stanley’s interest-rates and foreign-exchange trading units have generated more than half of fixed-income revenue over the last six quarters, compared with being smaller than the contributions from credit, commodities and securitized products in 2009, Porat said.