Morgan Stanley (MS) may be contemplating a stake sale of its multi-billion dollar commodities unit, according to a CNBC report. This move will be an important measure to counteract the increasing regulatory and credit pressures. Several companies, including the bellwether private-equity firm BlackRock, Inc. (BLK), are reported to have shown interest in buying the stake.
There might be numerous reasons behind Morgan Stanley’s idea of the stake sale. The primary reason can be the dwindling trade volumes of the unit in last couple of years, particularly ever since JPMorgan Chase & Co. (JPM) expanded its footprint in this arena.
The volatile market dynamics and shying away of consumers from betting big bucks amidst the strict regulatory environment have led to a downtrend in the commodity market along with reduced physical trading activities of the company.
Morgan Stanley’s hold over oil trading is fast diminishing with oil imports falling to their lowest level since 2004. The oil import has been on the downslide because of reduced demands from east coast, which in turn has also resulted in excessive refining capacity along with insignificant amount of exports.
TransMontaigne, a Denver-based refined petroleum products supply and distribution company and a valued wing of Morgan Stanley, has not helped it to cash in on the robust growth in U.S. crude oil trading this year.
Moreover, Morgan Stanley remains more of a trader, whereas its competitors have shifted focus to other profitable avenues like hedging risks and selling indices. Morgan Stanley’s share in the power market has also reduced substantially. All these dragged the unit’s performance.
Additionally, the proposed Volcker rule, which will limit proprietary trading activities of the banks, is a major cause of concern for Morgan Stanley, given the huge proportion of its commodities business. It will serve as an impediment for investing in illiquid cash market for commodities.
We believe that selling the commodities unit has both its positive and negative sides. The commodities unit has served as a profit-generating unit for a considerable period and chances are that Morgan Stanley would not like to give up on such decently-performing unit.
However, due to declining performance in the commodities market and stringent regulatory landscape, selling a stake may prove to be beneficial. Moreover, as the banking giant is preparing for a possible downgrading by Moody’s, selling off some stake in its commodities unit may help it to pay collateral worth billions.
Currently, Morgan Stanley retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain our long-term Neutral recommendation on the stock.