Morgan Stanley: Earnings 'Not Satisfactory'

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by: John M. Mason
Summary

Morgan Stanley turned in a fourth quarter earnings performance that was not unlike those of the other five largest banks in the United States.

These banks have been hit by trading woes and other unique bumps in the fourth quarter of 2018 with little or no consistent pattern to their overall performance last year.

For the year as a whole, Morgan Stanley, and the other largest banks, posted returns on shareholders' equity in excess of 10 percent, something not seen for a long time.

James Gorman, CEO of Morgan Stanley (NYSE: MS), when presenting the fourth quarter earnings for the company, declared that the results are “not satisfactory.”

Yet, the year as a whole was a strong one for the bank with annual revenue coming in at $40.1, a historical record for the organization. And, this was up from $37.9 for the year 2017.

The return on shareholders' equity for the year came in at 11.8 percent, above the assumed 10.0 cost of capital for the largest banks in the country.

Mr. Gorman, despite the fourth quarter results has done a magnificent job in turning the fortunes of Morgan Stanley around. He was one of the first among the big six largest banks, to change focus for the bank and restructure the organization after the financial collapse connected with the Great Recession.

Mr. Gorman took over the leadership of Morgan Stanley in January 2010 and also became Chairman in January 2012. He began to change the culture early on.

Morgan Stanley’s return on shareholders' equity hit a bottom of 0.2 percent in 2012, but has been on the upswing ever since. In 2014, this measure reached 8.7 percent, and remained around there until 2017 when it jumped to 9.3 percent.

According to the Wall Street Journal:

“Mr. Gorman has spent the past five years reshaping Morgan Stanley, steadying its earnings and avoiding the self-inflicted wounds that had made it Wall Street’s punching bag. The firm has boosted profitability in its retail brokerage, closing the gap with rival Merrill Lynch; shrunk its fixed-income trading; integrated the takeover of Smith Barney’s retail brokerage; and brought return on equity above 10%.”

So, even with the poor fourth quarter, he continued the bank’s recovery when taking the full year into account.

Mr. Gorman expressed optimism about the new year. “We do not believe the fourth quarter is a new normal... the first quarter of new year has started on a similar path to the first quarter of 2018,” he said. The bank’s returns targets for 2019 remained unchanged.

To Mr. Gorman, “one quarter doesn’t mean much” as Mr. Gorman “blamed most of the quarter’s slowdown on a tough environment, as markets swung around, investors retreated and corporate executives shelved deals.”

Like the other large banks, Morgan Stanley found that 2018 contained a lot of variability in markets and in outcomes.

Other CEOs at the largest banks expressed similar sentiments. Uncertainty pervades the markets, uncertainty both political, as well as a business, sources. There seemed to be no common thread running through the year’s performance of any of the “big six” financial institutions.

For example, in Morgan Stanley’s case, “Revenues at the bank’s wealth management division, usually a bulwark against volatility, was hurt by sharp losses in Morgan Stanley employees’ retirement accounts, where deferred compensation is held before it vests. Revenues in the division fell 6 per cent.”

The other banks suffered, but generally in other areas throughout the year.

The two themes attached to the fourth quarter of the year for all large banks were bad trading results and slow corporate capital raising.

Otherwise, each bank had its own unique story for the fourth quarter of the year, and for the year as a whole.

The one performance measure that was up for the year in all six large banks: the return on shareholders' equity was up… even at Bank of America (NYSE:BAC).

In fact, all six of the largest banks in the United States earned, in 2018, a return on shareholders' equity in excess of 10.0 percent.

It has been a very long time since this has occurred.

As I have commented in other posts this week, I believe that this is a major result of the way the Federal Reserve has conducted policy over the past ten years or so. All through the recovery, the Fed has attempted to err on the side of too much monetary ease in order for the banking system to stabilize and return to a healthier financial condition.

I believe that this has pretty well been achieved. It is noteworthy that two of the six banks, Citigroup, Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM), have explicitly stated that they have already slowed up their lending efforts and even added some additional loan loss provisions in the case of JPMorgan, to take on a very conservative stance for the uncertainties of the coming year.

One certainly gets the feeling that the six major banks in the United States are cautiously moving into the future. Given the events of the past 12 years or so and the regulatory pressures they have faced, they seem to want to avoid a replay of what they have just been through.

To me, this is an appropriate attitude for the upcoming period.

In conclusion, let me add that I have liked Mr. Gorman from the time he became Chairman of the bank and I believed that he began to make needed cultural changes in Morgan Stanley that the other large banks were going to have to follow. I believe that this has been the case. This one quarter relapse is “not satisfactory,” but I also believe that Morgan Stanley will continue to perform well and will continue to produce in the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.