- Cuts would be across regions and take place in next two weeks
- Bank's fixed-income trading revenue dropped 42% last quarter
Morgan Stanley is planning a reduction of as much as a quarter of its fixed-income staff after years of revenue declines and insufficient returns, according to people with knowledge of the plans. The shares rose.
The cuts will be across all regions and are set to take place in the next two weeks, said two of the people, who asked not to be identified because the decision hasn’t been publicly announced. Hugh Fraser, a spokesman for the New York-based bank, declined to comment.
It’s “a pretty substantial step” for a firm that has preferred for years to change the business incrementally amid an industrywide slump, said Brennan Hawken, an analyst at UBS Group AG, who recommends buying Morgan Stanley’s stock. “The fixed-income environment was rough last quarter, and it remains tough,” he said.
Morgan Stanley last month reported a 42 percent plunge in bond-trading revenue in what Chief Executive Officer James Gorman called its worst quarter for fixed income, currencies and commodities since he took over in 2010. While the financial industry may finally be reaching the end of a years-long slide in that business, it still isn’t clear how much revenue it’ll typically produce after stabilizing, Colm Kelleher, head of the investment banking and trading division, said at a Nov. 17 investor conference.
“The trick for us is to size our business appropriately to what we think the fee pool is,” he said. While trying to gauge that, the investment bank needs to keep the unit “credibly sized” to compete globally, and “make sure we have enough flex or leverage that when the markets recover, which we do think they’ll recover, you’ll be able to participate in the upside of that,” Kelleher said.
The cuts at Morgan Stanley’s “lousy” fixed-income unit could spark job cuts of between 1,500 and 2,500 workers and savings of about $500 million, or about 20 cents to 25 cents a share, according to CLSA Ltd. analyst Mike Mayo, who has a buy rating on the stock. The firm may focus on cutting so-called front-office jobs, or sales and trading employees, rather than “back-office” technology and development workers as it seeks to move toward electronic trading, Mayo wrote in a note to clients.
Morgan Stanley climbed 1.5 percent to $34.30 in New York, the second-biggest gain in the 87-company Standard & Poor’s 500 Financials Index. The stock is down 12 percent this year.
“Even if they think the cycle will turn, it seems like a prudent and timely move, given the extent of the unknown with fixed-income,” said Douglas Ciocca, CEO of Leawood, Kansas-based Kavar Capital Partners, which manages about $425 million and invests in financial companies.
“Investment banks are infamous for their undying optimism,” he said. But “oftentimes, it impedes them from making dramatic changes in a timely fashion.”
Gorman last month placed Ted Pick, who has led the equity-trading business, in charge of the entire trading division. While Morgan Stanley has reduced the capital that its fixed-income unit requires by more than half over the past four years, the bank still hasn’t reached its goal of a return on equity of at least 10 percent.
“They’ve struggled to generate sufficient return on equity in this business,” Hawkens said. “It’s nearly 40 percent of their risk-weighted assets, so it’s hard to generate good ROEs for the company when that much of your capital is generating such a weak return.”
Stiffer capital rules, a slump in client transactions and a shift toward electronic trading have crimped margins in key fixed-income markets, pushing banks to pull back and eliminate staff. Kelleher said last year that the new supplementary leverage ratio -- which measures a firm’s capital against total assets -- made banks unable to earn sufficient returns in some interest-rate trading businesses.
Morgan Stanley generated $3.75 billion in fixed-income revenue in the first nine months of this year, seventh among major global investment banks, according to data from Bloomberg Intelligence. The firm produced $6.31 billion in equity trading revenue in that period, most among the banks.
Revenue from fixed-income, currencies and commodities trading, or FICC, is on pace to drop to $65 billion this year at the 10 largest global investment banks, according to industry analytics firm Coalition Ltd. That would be the lowest since the financial crisis and less than half of what those companies produced in 2009. The firms on average employ 1,700 front-office workers within FICC, according to Coalition.
The withdrawal from the business has been particularly severe in Europe, where firms including UBS, Deutsche Bank AG and Barclays Plc have sought to shrink their operations to rein in costs.