Morgan Stanley, armed with cash from fixed income dump, goes shopping
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.
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.
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.
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."