Morgan Stanley Wealth Profitability to Plunge But Worst Is Over: CEO
Morgan Stanley Chief Executive James Gorman said that while the “worst” of the coronavirus pandemic’s effect on earnings is “clearly behind us,” pretax profit margins in the wealth management unit would drop in the short term due to the fall in interest rates.
Like all big banks, Morgan Stanley’s profitability has been directly affected by the interest rate cuts the Federal Reserve Board has implemented to revive the coronavirus-halted economy. The resultant decline in net interest margins has deprived Morgan Stanley of “several hundred million dollars” of revenue that was “noncompensable” to advisors and other employees that would have gone “straight to the bottom line,” Gorman said.
Morgan Stanley has made a bigger bet on wealth management than other large investment banks, and Gorman reassured investors that his goal of generating profit margin of 28% to 30% in the wealth division is unchanged. Margins were in the single digits when he arrived at Morgan Stanley in 2006.
“The wealth management targets are going to be impossible to hit at 28% in this environment, but that doesn’t mean you can’t have very good business growth,” said the 61-year-old executive, who recently revealed that he had recovered from the Covid-19 illness. “We have to get past this rate cycle and build those other legs.”
He was referring to technology that executives said will help Morgan Stanley’s more than 15,000 advisors gather more held-away assets from wealthy clients and to the firm’s pending purchase of E*Trade Financial and its acquisition last year of workplace stock management firm Solium Capital.
The E*Trade deal remains on track to close in the fourth quarter, he said, and will add new lines of business in online discount brokerage, digital banking while fortifying Solium’s corporate stock plan servicing business.
“It’ll diversify the company even more,” Gorman said of the pending $13-billion E*Trade deal, “which should ultimately—dear investors, please listen—translate into a higher multiple on earnings.”
Morgan Stanley’s price-to-earnings ratio of about 10.89 is well behind the 16.74 p/e ratio of the broad financial services industry, according to Zacks Investment Research.
Gorman has previously downplayed the importance of E*Trade’s relatively small $20 billion-asset RIA custody business, but referred to the channel at the conference as “a fast-growing part of the marketplace.”
He also put in a plug for Morgan Stanley’s conventional brokerage workforce.
“We’re always in the market for talented people, and frankly, without being arrogant, we’re a place of choice right now on the street for wealth management,” said Gorman.
Morgan Stanley had pulled out of the Protocol for Broker Recruiting and withdrawn from the expensive process of hiring from competitors two years ago, but in recent months has revived its recruiting appetite.
Gorman, a former McKinsey consultant, has been an aggressive cost-cutter and in April said that the work-from-home necessities of the pandemic has yielded the unexpected insight that the company may need “much less real estate” to house its more than 60,000 employees.
He modified the comment on Tuesday, saying it had been amplified out of proportion.
“There will be some real estate efficiencies over time, but it’s not like we’re going to suddenly cut our real estate portfolio in half,” he said. “That was a ridiculous assumption based on a passing comment.”