Over the years, U.S. banking giant Morgan Stanley (NYSE:MS) has established a reputation as a proficient high-profile M&A deal broker--not to mention the go-to house for defense mandate against unsolicited bids. But even that hasn’t kept it immune from growing pains in key overseas markets. A few months ago, Bloomberg reported that the bank was dropping some of its international wealth-management clients--a newly minted yet lucrative business for the 88-year old bank.
And now MS has just announced plans to close down a core operation. Morgan Stanley says it will shutter all its Russian operations within the next 12 months, or effectively by first quarter of 2020. Morgan Stanley’s Russian arm claims that sanctions by the U.S. and EU have made it too hard for businesses in Russia to access international capital markets.
The announcement comes at a time when MS shares are on the mend after a disastrous period last year that saw them hammered due to a drop in income at the bank’s pivotal bond trading segment.
Still, shares have outperformed the sector benchmark, the Invesco KBW Bank ETF (KBWB) in the YTD and also over the past three years.
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Source: CNN Money
Significant impact
MS plans to shut down its Moscow equities and currency trading units. Morgan Stanley becomes the latest foreign lender to exit Russia joining the likes of Credit Suisse AG, Deutsche Bank AG and Citigroup. A couple of local banks have also scaled back their ambitions.
Russian markets have been punished by increased sanctions designed to punish the Kremlin since its 2014 annexation of Crimea from Ukraine. MS though says it remains committed to the Russian market and will keep its consulting business in the country since this does not require a license.
So, how bad will the bank’s decision to offload a key business impact the income statement? Well, MS did not give any figures, preferring to be a bit vague:
“(The) impact of changes in the economy on the future results of the bank’s business and its financial condition may turn out to be significant.”
Morgan Stanley is not your classical investment bank but rather is more of a financial holding company or commercial bank with a big focus on investment banking including provision of services to governments, corporations, private financial institutions and high-net-worth individuals. MS, together with its great rival, Goldman Sachs (NYSE:GS), are credited with leading Wall Street’s recovery after the last financial crisis.
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The bank made big changes to its revenue model from 2011-2012 by reducing its focus on fixed income activities and focussing more on equities and bond trading. These changes were made to fit a lower-beta revenue model prescribed by the Dodd-Frank Wall Street Reform Act.
On the investment side, MS has been focussing more on riskier but high-growth tech companies. MS was the lead underwriter for Google, Inc. Cisco Systems, Groupon and Salesforce.com and has also been instrumental in IPOs such as Apple, Inc., Facebook, Inc. and Snap, Inc.
Bond trouble
Most banks’ trading desks ended 2018 with a whimper. However, few rivaled Morgan Stanley’s pain after the bank posted the worst bond-trading performance of the Big 5 banks—a massive 30 percent drop in segment income to $564 million. Trading makes up a bigger slice of the bank’s revenue than its peers so that really hurt overall performance. Morgan Stanley’s equities desk ranks as Wall Street’s biggest stock trading shop.
Nevertheless, MS has managed to bounce back—somewhat-- as its latest set of quarterly results show.
Q1 2019 adjusted EPS of $1.33 beat Wall Street consensus by 16 cents. Net interest income of $1.01B was marginally better than Q4’s print of $989M and $975M in Q1 2018. Wealth Management net revenue of $4.39B also marked a marginal improvement compared to $4.37B a year ago.
Investment Management revenue of $804M represented 12 percent Y/Y growth while AUM of $480B increased from $469B a year earlier.
However, the firm’s trading desk continued to show weakness. Institutional Securities net revenue of $5.20B fell from $6.10B a year ago, with Sales & Trading revenue of $3.74B dropping 15% while Investment Banking revenue of $1.15B was a 24% Y/Y contraction.
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Source: Seeking Alpha
Regardless, MS stock is still viewed quite favorably on Wall Street, with a consensus 4.11 out of 5 Outperform rating.
By Alex Kimani for SafeHaven.com
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