|
 In fact, the bank wants to double the size of these custom loans to
10 percent of its loan book, up from about 5 percent today, Eric
Heaton, president of Morgan Stanley's U.S. banks, told Reuters in an
interview.
The idea is to strengthen ties with wealthy individuals so they will
be more inclined to use Morgan Stanley for other services - whether
that is managing their investments, selling a business or taking one
public.
Morgan Stanley has been lending more since acquiring the Smith
Barney brokerage business from Citigroup Inc. It had almost $200
billion worth of loans at year-end – quadruple its size three years
earlier.
Until recently, Morgan Stanley has not focused much on what it calls
"tailored lending" because it's a niche business: only 20,000 of the
bank's more than 3 million clients qualify for such loans, by having
a minimum of $10 million in investable assets.
Morgan Stanley first focused on the simpler, less lucrative business
of lending against wealth clients' investment portfolios, as well as
mortgages and merger financing. It is now turning to tailored loans
because they have high profit margins and, perhaps more importantly,
because it's a good way to encourage wealthy clients to do more
business with Morgan Stanley.
"This isn't a one-off initiative to grow the bank, it's an important
piece," said Heaton.
Though he declined to give a timeframe for reaching the 10 percent
target, Morgan Stanley has been laying the groundwork for some time.
In 2014, it hired Marcus Mitchell from Deutsche Bank AG to oversee
its tailored lending build-out. A year ago, the bank started making
loans with museum-quality art as collateral. More recently it began
lending against stock in privately held companies, and is now
looking toward other offerings, including loans against private
aircraft.
Tailored lending is just one component of Morgan Stanley's broader
lending goals. Management has set its focus on loans as a key source
of revenue growth, as the bank struggles to generate a return on
shareholder capital of 9 to 11 percent by 2017. That goal, set by
Chief Executive James Gorman, has been elusive because of hard luck
in other businesses – particularly fixed-income trading.
Morgan Stanley is not the only bank facing these challenges.
Although most rivals have been producing better returns, near-zero
interest rates have broadly weighed on profits, because they
diminish the money banks can earn investing idle cash in securities.
That means competition to lend to the most attractive borrowers is
stiff. And when it comes to tailored lending, risks can be hard to
manage, said Portales Partners analyst Paul Gulberg.
[to top of second column] |
"This type of lending carries idiosyncratic risk," he said. "Your
risk is against mispricing something because you are working with
products that are very unique."
HIGH MARGINS
Morgan Stanley says it hires outside appraisers to assess values of
one-of-a-kind items it lends against. The bank believes tailored
loans are worth the risk, partly because they tend to have higher
margins than traditional loans like mortgages, Mitchell said in an
interview.
Mitchell would not say what margins Morgan Stanley earns on tailored
loans, but because clients often need financing in a pinch, and
because the loans have unique risk profiles, banks have more leeway
in charging higher rates.
A private banking executive at another firm said that very unusual
tailored loans can deliver margins of eight percentage points but
that the types of loans Morgan Stanley is offering likely have much
lower margins. By comparison, mortgages tend to have a margin of
around 1 percentage point, analysts said.
Morgan Stanley currently lends out about $50 billion of its $149
billion in deposits within wealth management, and is targeting $60
billion by the end of 2017. Tailored loans account for roughly $4.5
billion of that, compared with $21 billion in mortgages.
Morgan Stanley is also looking to expand into other types of
lending. For instance, late last year it began extending loans to
private-equity funds that need cash for investments between the time
investors commit capital and deliver hard cash.
These so-called "capital call subscriptions" come with a special
risk too: that investors may not send the money they promised.
Heaton said the risks are low and the business is profitable.
(Reporting by Olivia Oran in New York; editing by Lauren Tara
LaCapra and Andrew Hay)
[© 2016 Thomson Reuters. All rights
reserved.] Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
