Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

For Morgan Stanley's wannabe shareholders, this may be your time to pounce. 

The New York bank's shares fell as much as 3.3 percent on Tuesday, despite a string of good news: Earnings per share blew past analysts' estimates as Morgan Stanley posted its highest fourth-quarter profit since 2006 and record annual revenue. Those feats were made possible by a strong performance from its fixed-income trading unit, which has managed to maintain its share of fees despite cutting 25 percent of its staff as part of a broad restructuring -- displaying resilience that should give other banks some food for thought.

Not only that, but the bank's heavier focus on wealth management continues to pay off for Chairman and Chief Executive James Gorman. The unit delivered record revenue despite reduced activity from retail investors and persistently low interest rates for most of the quarter. With rates forecast to climb and a potential resurrection in transactions by individual investors, this figure should reach a new high in 2017. One area of focus is the bank's loans and lending commitments to wealth-management clients, which climbed 24 percent from a year earlier to $69 billion. Any replication of that momentum should help the bank offset any declines that may befall its institutional securities unit, which makes loans to companies, and saw its overall commitments fall nearly $10 billion (or 7 percent) to $133 billion from 2015. 

Where To From Here?
Margins at Morgan Stanley's wealth management arm got a boost from its increased ownership of Smith Barney (first in 2009; the rest in 2012). Future gains will need to come from elsewhere.
Source: Company presentation
*Target range: 23% to 25%

Increased lending isn't the only tool that Morgan Stanley is using to bolster its wealth-management business, which accounted for 44 percent of its 2016 revenue. The bank is also investing in digital innovations that should enable its 15,000-strong army of advisers to better interact with clients via technologies including video, text messaging or online chat, at modernizing branches. Already, it has inked ten digital partnerships in the past year, one of which was with Addepar Inc., which Bloomberg News last week explained is a software provider that tracks and analyzes exposures across portfolios. 

Lending a Hand
Morgan Stanley's rate of growth in loans to wealth management clients has been outpacing that of its institutional securities group, which lends to corporate clients.
Source: Company filings

Morgan Stanley's decline on Tuesday (along with other U.S. bank stocks) doesn't reflect its results, the position of its business or its ability to hit a targeted return on equity of 9 percent to 11 percent by 2017. Rather, the sector's tumble is being chalked up to uncertainty about tax reform under President-elect Donald Trump. Still, after the rally these stocks have staged since the election, it provides an opportunity for those who have been waiting for a more reasonable entry point and believe that there are further gains to be made:

Room to Run
Tuesday's pullback may encourage investors to take another look at bank stocks
Source: Bloomberg

Tuesday's decline may prove to be simply a blip, especially if Goldman Sachs Group Inc. and Citigroup Inc. -- both set to report Wednesday -- deliver results that validate their respective valuations, as expected. Watch this space. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net