As I browse through bank stocks after a dismal year in stock performance for the sector, I find myself at one of Wall Street’s legendary institutions, Morgan Stanley (NYSE:MS). I decided to take a look at their business model for a variety of reasons; one being that it derives its revenues from activities other than retail banking. Given that within the financial sector this is where there is the most uncertainty, it naturally contains much of the opportunity.
Looking at financial institutions' 2011 share price performance, MS found itself in the middle of the pack down just over 40% [click to enlarge images]:
In terms of MS’s revenue, it is extremely concentrated in institutional securities, making up 87% of their net income thus for this year.
Within institutional securities, revenues are also highly concentrated in trading.
Knowing how a business makes money is one part of the puzzle, but equally noteworthy is whom they make money for, which is where things get interesting.
Morgan Stanley survived the 2008 crash in large part due to an investment by Mitsubishi UFJ Financial Group (NYSE:MTU), a Japanese bank. Another one of its large shareholders is China Investment Corporation, a wholly state owned company of the People’s Republic of China. Between these two organizations, they own 30% of MS, which in a company with a market cap of $30 billion equates to $9 billion, a substantial sum.
Because of this, geographically Morgan Stanley has a massive Asian ownership interest at 31.3% of the company, of which 30% is a Japanese bank and the Chinese government.
This is sustainably different from other US banks, whose Asian ownership stakes are as follows:
These Asian ownership statistics include the entire Mid-East region as well, thus the fact that 30% of MS’s ownership is only in Japan and China is especially remarkable.
Turning our attention to where MS derives its income, for all its Asian ownership, MS only derives a small portion of its revenue from the region.
When assessing the US Financials as an investment, this ownership stake is an important differentiating factor. The People’s Republic of China has a preference for dealing with companies it either owns outright or owns a substantial part of, potentially opening up billions of dollars in future business for MS in China. There’s also the emergence of the Yuan as one of the world's reserve currencies, in which MS may be allowed to play a role, due to China’s ownership interest. As demonstrated by MS revenue pie chart, this would fall under their core competency of institutional securities.
Contrarily, with the short term Chinese economic difficulties, there may be other considerations to make, such as the Chinese Investment Corporation having to liquidate MS holdings to pay for national projects, or perhaps the Chinese Investment Company and Mitsubishi bought into MS for its US exposure with no plans for expansion in Asia. In any event, this stark contrast will entail different shareholder interests for MS than any of the other large US investment banks, which is what boards and subsequently management are beholden to.
As anyone who’s worked as a “bankster” can attest, finance is a relationship business. MS has an almost insurmountable competitive advantage in terms of relationships in Asia with two of the most influential names in Asia owning substantial parts of the company. If leveraged correctly, these relationships will assist MS in expanding rapidly in the region by providing access to companies and contacts that would be out of reach for other US institutions. The question is do they have the team in place to do so, which only time will tell.