Morgan Stanley is expanding the types of debt it buys as deposits increase with the purchase of its brokerage venture and interest rates remain near record lows.
Morgan Stanley added $677 million of collateralized debt obligations to its available-for-sale portfolio in the first quarter and increased its corporate bond holdings to $3.53 billion, according to a regulatory filing yesterday. The portfolio was invested solely in government and agency debt and U.S.-backed student loans at the end of 2011.
The available-for-sale portfolio grew 27 percent to $41 billion in the 12 months through March as the firm gained investable deposits by acquiring more of the brokerage from Citigroup Inc. Morgan Stanley will get an additional $60 billion over time after buying the rest of the venture this year, and Chief Executive Officer James Gorman has sought to build the lending business to produce better returns from those funds.
Morgan Stanley owned $29.1 billion of U.S. Treasury and agency debt on March 31, down from $30 billion a year earlier. The portfolio had $2.17 billion of auto loan asset-backed securities, up from $237 million, and almost six times the amount of corporate bonds it had in March 2012.
The portfolio still contained less credit risk than that of larger banks. While Treasury and agency securities accounted for 71 percent of Morgan Stanley’s available-for-sale book, they comprised only 3.2 percent of Wells Fargo & Co.’s and 3.3 percent of JPMorgan Chase & Co.’s at year-end.
Gorman, 54, was on a council of bankers that warned the Federal Reserve in February of the potential harm of low interest rates to U.S. financial institutions even as they endorsed the central bank’s record stimulus.
“The margin pressures that the low-rate environment has put on financial institutions, coupled with dramatically increased compliance and other infrastructure costs, have caused many to seek higher returns by accepting greater interest-rate or credit risk,” the bankers said on Feb. 8, following a Federal Open Market Committee meeting on Jan. 29-30.
Morgan Stanley had $211 million of net unrealized gains in its portfolio as of March 31, according to the filing. That’s down from $257 million at the end of 2012.
The bank increased both consumer and residential real estate loans in its brokerage business by at least $300 million in the quarter from the end of last year, according to the filing. About 5 percent of Morgan Stanley wealth-management clients have a loan with the bank, compared with an average of 10 percent for competitors, Gorman said in a January presentation.
Total loans were $47.1 billion, up from $46.4 billion at the end of 2012. The bank had a $129 million allowance for loan losses, which covered $26.5 billion of loans held for investment.