Promise Keeper

Morgan Stanley Confirms Its Status as Wall Street's New Reliable

The bank continues to meet its goals, unlike most rivals.
Peter Foley/Bloomberg
MORGAN STANLEY
+1.21
At Closing, February 23th
56.07 USD

Morgan Stanley can do little wrong, at least for the time being.

The New York lender just capped off fourth-quarter earnings from the major U.S. banks with results that showed the former underdog is settling into its role as one of Wall Street's more reliable, well-balanced firms. To earn that title, Morgan Stanley under CEO James Gorman has met its strategic goals, a feat that has so far proved out of reach for most of its key rivals. These include the restructuring of its fixed-income arm (where revenue was wanting this quarter), a more generous shareholder payout plan and a stronger contribution from its crown jewel: wealth management.

Its longtime bet on the steady-as-she-goes business continues to bear fruit, assisted by a rising stock market that has lifted the value of client assets and respectively, the fees earned by the bank. Wealth management bested its goal of a pretax margin between 23 percent and 25 percent, thanks in part to a compensation ratio that met its targeted level of 56 percent.

Goal Kicking

Morgan Stanley continues to squeeze more out of its wealth-management division, which was responsible for 44 percent of its 2017 revenues. Can it keep going?

Source: Bloomberg

*The bank's 2017 goal was for this to be between 23 percent and 25 percent

The strength of wealth management has helped the bank reach its targeted return on equity, the closely watched profitability metric. After several paltry years of returns outside management's preferred range of 9 percent to 11 percent, Morgan Stanley delivered ROE of 9.4 percent, excluding the impact of changes to tax legislation. 

Target Zone

Morgan Stanley's full-year return on equity was higher than 9 percent for the first time since 2010, which is within its target range, but the bank is still not best in class

Source: Bloomberg, company filings

*Morgan Stanley had been targeting ROE of between 9 percent and 11 percent

There's plenty of room for profitability to improve, but Morgan Stanley's rising dependability factor hasn't gone unnoticed. Its price to book value, which lagged Goldman's for the better part of the almost two decades that they've both been publicly traded, has caught up:

Equals

Morgan Stanley, which once traded at a discount to Goldman, has more recently found itself on an equal footing

Source: Bloomberg

The thing is, investors aren't the type to celebrate for long, and they'll want reassurance that Morgan Stanley can maintain its consistency. With most expense cuts having already been made and an expected tax cut about to take hold, the question now is whether the bank can capitalize on fresh opportunities, such as bettering its institutional securities arm (which already includes a market-leading equities platform) and searching for growth in its investment-management division. 

If it does, and if its wealth-management arm continues to deliver the goods, Gorman may have a relatively easy time achieving the bank's refreshed target of ROE between 10 percent to 13 percent much sooner than its "medium-term" horizon.

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

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE