Morgan Stanley, owner of the world’s largest brokerage, said it fell short of a minimum leverage ratio proposed by U.S. regulators last week that measures a firm’s ability to withstand losses.
The company’s supplementary leverage ratio, a gauge of capital to total assets, was 4.2 percent in the second quarter, below the proposed 5 percent minimum, Chief Financial Officer Ruth Porat said on a conference call with analysts today. The ratio at Morgan Stanley’s deposit-taking bank subsidiary was above the proposed 6 percent minimum, she said.
Morgan Stanley will exceed both requirements by 2015, Porat said. The company announced plans earlier today to buy back $500 million in stock, and Porat said the firm’s plan to reach 5 percent by 2015 includes further capital returns to shareholders.
“The large banks will all manage against the new leverage ratio well in advance of the ultimate application, which I think is 2018,” Chief Executive Officer James Gorman said in a Bloomberg Television interview with Erik Schatzker. “Our capital plans will reflect the accretion of earnings.”
While banks would have more than four years to comply, lenders may have to retain some capital to meet the requirements that they otherwise could pay out through dividends or share repurchases. Gorman has said his plan to boost return on equity to 10 percent by next year depends on regulators allowing the firm to return a “reasonable” amount of capital to shareholders.
The U.S. proposal surpasses the 3 percent global minimum that the Basel Committee on Banking Supervision approved to help prevent another financial crisis. The changes would force lenders to fund more assets with capital that can absorb losses instead of with borrowed money.
“This is a continuation of trying to find the right position for this industry, which is the backbone of any economy, to make it safe and stable and at the same time leave it in a position where it can drive economic growth,” Gorman said in the interview.
Gorman said regulators should be “very thoughtful” about whether to exclude certain assets, such as Treasuries, from the calculation. Morgan Stanley would probably be in compliance with the rule if U.S. government securities were excluded, Goldman Sachs Group Inc. analysts led by Richard Ramsden said in a July 10 note.
Morgan Stanley can probably boost its leverage ratio by reducing fixed-income assets and moving derivative contracts to central clearinghouses, Porat said.
While Morgan Stanley trails rivals on its leverage ratio, it surpasses some of them on risk-based capital ratios. The firm’s Basel III Tier 1 Common ratio was 9.9 percent in the second quarter, the second-highest among the six largest U.S. lenders.
Bank of America Corp., the second-largest U.S. bank, said yesterday that its supplementary leverage ratio was between 4.9 percent and 5 percent in the second-quarter. The ratios at the Charlotte, North Carolina-based lender’s U.S. deposit-taking and credit-card units exceed 6 percent, Chief Financial Officer Bruce Thompson told reporters.
Citigroup Inc., the third-biggest U.S. bank, said its ratio averaged 4.9 percent in the second quarter and in June exceeded the 5 percent minimum. The New York-based company hasn’t calculated a ratio for its deposit-taking unit, CFO John Gerspach said July 15. He said the ratio was about 6 percent in March.
Wells Fargo & Co., the largest home lender, exceeds both minimums, CEO John Stumpf said last week. Goldman Sachs Group Inc. said it’s “very comfortable” with its ability to meet the new U.S. minimum, without giving the current level.
JPMorgan Chase & Co., the biggest U.S. bank, said last week that both its holding company, which had a 4.7 percent ratio, and deposit-taking subsidiary fall short of the proposed minimums. CEO Jamie Dimon criticized the plan for going further than international requirements.
“If one is 3 percent and one is 6 percent, that becomes just too big, and over time it can have huge competitive effects,” Dimon said on a July 12 conference call. “We always ran with higher capital and liquidity than most of our competitors.”