January 18, 2013 10:52 pm

Morgan Stanley: on the hook

Gorman’s cost-cutting pledge has salutary effect on the bank’s shares

Not only has James Gorman promised investors a new Morgan Stanley; he has gone and quantified that commitment. During the bank’s fourth-quarter earnings results call, he put the company on the hook for delivering $1.6bn in cost cuts through 2014, whatever happens to revenues. The goal is higher returns, with the bank aiming for return on equity of 9 to 11 per cent (in 2012, it managed 5 per cent). Mr Gorman’s pledges had a salutary effect on the shares, which shot up as much as 8 per cent on Friday, to their highest point in more than a year.

Meanwhile, the bank earned $0.45 a share in the quarter, excluding the effect of gains in its own debt, almost doubling analyst estimates. Yet results were mixed. Investment banking was robust, as it was for other Wall Street banks, as low rates drove up debt issuance and there was a flurry of deal-making at the end of the year. The global wealth management group, created by the consolidation of Smith Barney, the brokerage business it once split with Citigroup, showed progress, producing a pre-tax margin of 17 per cent, up from 7 per cent a year ago, as compensation came down and the move to a single platform for all of Morgan’s brokers reduced costs.

Revenues in fixed income and commodity trading were weak, which is worrisome given the higher capital levels regulators will soon require that business to hold. In Morgan Stanley’s banking and trading operations, compensation fell to 44 per cent of net revenue in 2012, versus 53 per cent in 2011. Good news, but Goldman’s 38 per cent ratio shows that this number can come down still further. The new Morgan Stanley can’t arrive soon enough.

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