Is it time to start getting excited about Morgan Stanley?
Whether you are an employee or an investor, it obviously can be hard to get too excited about a company when its best plans to increase returns involve cutting costs, even when the programs are branded with catchy euphemisms like "Project Streamline" and "Centers of Excellence."
The Wall Street analysts who cover the stock, for what it's worth, aren't too excited. With less than 42 percent of them rating it "buy" or equivalent, Morgan Stanley trails even woebegone Wells Fargo in that metric of enthusiasm:
Yet, the shares that fell 18 percent last year have finally been poking their head above water on a year-to-date basis, something that's not true of every big bank stock.
The headline that will draw most of the attention from the firm's third-quarter results will be the tripling in fixed-income trading revenue. While the eye-popping comparison is mainly due to an eye-poppingly ugly quarter last year, the almost $1.5 billion in revenue booked in the period is nothing to sneeze at considering it comes after a 25 percent reduction in headcount.
Elsewhere, wealth management revenue increased 7 percent to $3.88 billion as the firm's nearly 16,000 reps brought in average annualized revenue of $977,000 in the quarter, up from $922,000 in the same period last year. Investment banking revenue fell 7 percent to $1.23 billion but topped the average estimate of $1.08 billion tracked by Bloomberg.
The much fixated-upon return on equity was 8.7 percent, edging closer to the goal of 9 percent to 11 percent that the bank has set for itself.
The 10 percent ROE hurdle is widely viewed to be the cost of equity that banks need to clear to satisfy investors. It's a threshold that has grown much more elusive for many firms as regulators force them to build up capital. Morgan Stanley CEO James Gorman pointed out on Wednesday's conference call that ROE would be closer to 20 percent if capital measures were at precrisis levels. Waiting for a firm to attain double-digit returns on equity may mean missing out on solid gains along the way, especially because Morgan Stanley has quadrupled its dividend since 2014, and its indicated yield stands at about 2.5 percent.
There are plenty of variables that could derail Morgan Stanley's path forward. It needs to navigate successfully through the Labor Department's new fiduciary rule, avoid any new large legal entanglements and hope that no new geopolitical or economic monkey wrenches are thrown at markets. And with an efficiency ratio that shows its costs are still almost a dime more for each dollar of revenue than rival Goldman Sachs, it may need to consider more difficult "streamlining" decisions once it completes its $1 billion in planned cost cuts.
Yet, the list of things that could go right for the streamlined firm are intriguing. Its recent victory as top underwriter of Snapchat's initial public offering could be a nice harbinger should the thaw in frozen IPO markets, especially technology, continue.
And the uncertainties around the U.S. election and Federal Reserve policy -- which Gorman said have dragged transactions in the wealth-management business close to the lowest levels he's ever seen -- won't last forever.
If things go right, neither will the discount to book value that the stock has been saddled with for most of the year.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Michael P. Regan in New York at firstname.lastname@example.org
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