Morgan Stanley, owner of the world’s biggest brokerage, will buy the remaining 35 percent of its wealth-management venture with Citigroup Inc. after winning Federal Reserve approval in the regulator’s annual stress test.
The purchase is subject to other regulatory approvals, the New York-based bank said today in a filing. Morgan Stanley would have a 5.62 percent Tier 1 common ratio in the most adverse economic scenario even after buying the stake, above the 5 percent minimum, the Fed said today.
Chief Executive Officer James Gorman, 54, already has set a price with Citigroup to purchase the rest of the brokerage venture, which was created in 2009. Morgan Stanley said in January that it will pay $4.7 billion for the last piece, which will place demands on an additional $400 million of capital.
“The Federal Reserve’s non-objection to our capital plan is another important step towards full ownership of our wealth-management business, which has been one of the Firm’s key strategic priorities since 2009,” Gorman said in a statement. “We look forward to completing the acquisition of the remaining 35 percent stake in our wealth-management joint venture.”
Gorman has staked his strategy in large part on buying all of the brokerage and increasing profitability at the unit. Morgan Stanley has said it will earn about $400 million in 2013 from buying the rest of the venture as the company eliminates non-controlling interest payments to Citigroup and benefits from more retail orders and deposits.
Morgan Stanley didn’t ask the Fed to approve any additional return of capital to shareholders through dividends or share repurchases.
“There’s a time for returning capital, but given the importance of the wealth-management joint venture, that’s our first priority,” Chief Financial Officer Ruth Porat said in a January interview. “Longer-term, we are focused on returning capital to shareholders, whether in the form of share repurchases or dividends.”
The Fed began annual stress tests in 2009 to evaluate the health of the U.S. banking system. In 2011, the central bank adopted an approach known as Comprehensive Capital Analysis & Review, or CCAR, which focused on lenders’ capital plans, assessing how dividend increases or share buybacks would affect them. Those results were announced today.
Regulators subject bank portfolios, capital levels and profit-making potential to conditions that simulate an economic recession or financial shock. This year’s stress tests involved three scenarios, including two stressed situations. In one, the economy contracts for six quarters and inflation and interest rates rise sharply. In the other, unemployment climbs above 12 percent and stocks fall 52 percent.