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Last updated: November 29, 2012 7:25 pm
Morgan Stanley’s chief executive wants to use the bank’s excess capital to boost returns for the company’s “long suffering” shareholders.
In the strongest signal yet that Morgan Stanley is preparing to hand back more than token sums to shareholders since the financial crisis, James Gorman told a securities industry conference on Thursday that the investment bank was now “capital flush”.
Asked whether the bank would deploy excess capital in expanding businesses, Mr Gorman said: “To my mind the much better action is giving it back to the long suffering shareholders.”
However, Mr Gorman acknowledged Morgan Stanley would have to pass the Federal Reserve’s bank stress tests, known as the Comprehensive Capital Analysis and Review, or CCAR, to be able to make an extra payout to investors.
The bank is currently working on its CCAR submission, according to people familiar with the plan.
Investment banks have been struggling to increase returns for their investors as new regulation forces them to hold extra capital, exit historically profitmaking businesses and cut leverage – the level of a bank’s total assets compared with its equity.
Shares of Morgan Stanley have largely traded sideways since the beginning of the year and are now three quarters below their pre-crisis peak.
“If you cut your leverage from 33 to 11, as we did, and you raise your capital from $30bn to $66bn, as we did, and you raise your liquidity,” Mr Gorman said, then “you go from making a 20 per cent return to a 5 per cent return. That’s reality.”
Morgan Stanley has been increasing its regulatory capital and transforming its business under Mr Gorman. It is currently in the process of buying the rest of Smith Barney, Citigroup’s retail brokerage, which it expects to help boost its earnings.
Passing the stress tests would allow Morgan Stanley to raise dividends above the 5 cents a share it has been paying since early 2009. The bank also has yet to buy back any stock under its share repurchase programme, which was approved by regulators back in 2006 and still has $1.56bn of buyback capacity outstanding.
Earlier this year Citi failed to win approval for its own buyback plans, in a defeat which helped lead to the resignation of Vikram Pandit as chief executive last month. JPMorgan Chase suspended its plans to buy back stock, after its “London Whale” trading loss meant the bank needed to preserve capital rather than return it.
On Thursday, Mr Gorman, who also owns Morgan Stanley shares, said such unpredictable trading losses were keeping the reputations of banks “in the doghouse”.
“It’s a really difficult problem right now,” Mr Gorman said. “Let’s say you want to be out ahead of it and give a lot of speeches and talk about all the good the industry is doing,” he said, “and then some trader does some stupid thing like this guy at UBS did, and all bets are off.”
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