Morgan
Stanley, armed with cash from fixed income dump, goes shopping
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[October 18, 2014]
By Lauren Tara LaCapra
NEW YORK (Reuters) - Morgan Stanley
<MS.N>, which has spent three years throwing out bad apples from its
fixed income trading portfolio, now wants to put the freed up money into
businesses that bear healthier fruit.
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It is reinvesting capital previously held against unprofitable
trades into areas like municipal bonds, credit and securitization,
where it sees opportunities for boosting profit, senior executives
at the bank said on Friday.
This step represents a turning point in the bank's efforts to shrink
to the point where it can make money again in bond trading. New
regulations put in place after the financial crisis have made the
business more expensive for big banks, forcing them, for example, to
use shareholder money to finance their trades instead of cheaper
debt. As trading becomes more expensive, many banks have to be
choosier about which trades to do.
"We've been very focused on 'what is the return on equity in the
business?'" Chief Financial Officer Ruth Porat said in an interview
on Friday, referring to a measure of profitability.
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The bank's risk-weighted fixed-income trading assets have shrunk to
$190 billion, close to its target of $180 billion by the end of next
year, giving Morgan Stanley more room to reinvest in the business
again, the executives said.
At this stage, Morgan Stanley's bond trading business sits in a gray
zone - not as big as JPMorgan Chase & Co's <JPM.N>, nor as
profitable as Goldman Sachs Group Inc's <GS.N>.
The bank's executives have sometimes been inconsistent in their
statements about where the business is headed.
In 2010 and 2011, management said the bank was committed to growing
revenue in a range of fixed-income trading businesses, and pledged
to increase market share by 2 percentage points. One focus was
growing trading in interest-rate driven products like Treasuries, a
business that generally requires a big balance sheet to be
successful.
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The bank quietly scrapped that plan as regulations evolved, and
after the person it had hired from Goldman Sachs to expand that
business was unsuccessful and left.
Morgan Stanley executives later told analysts that the fixed-income
trading unit just needed to reach an average quarterly revenue of
$1.75 billion to be profitable. But more recently, executives have
said that goal is no longer relevant because they are just focused
on improving returns.
In the third quarter, Morgan Stanley produced $1 billion in adjusted
fixed-income trading revenue, beating analysts' average forecast of
$885 million.
Analysts and investors said the results show that size does not
matter for fixed-income trading overall, but does in areas that a
bank excels in.
"You don't have to be the biggest in FICC; you have to be the
biggest in what you do in FICC," said KBW analyst Brian Kleinhanzl,
referring to an acronym commonly used for the Fixed Income, Currency
and Commodities business. "That goes all the way back to corporate
strategy 101. Let's figure out what we do well and do that and stop
trying to be all things to everybody."
(Reporting by Lauren Tara LaCapra; Editing by Dan Wilchins and
Richard Chang)
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