Morgan Stanley: time to rethink that wealth manager premium

Morgan Stanley’s “three-legged stool” strategy to enterprise is being put to the check. As led by James Gorman, the Wall Avenue group has lengthy commanded a premium over funding banking rival Goldman Sachs, due to the previous’s wealth and asset administration companies.

Each have offered secure, recurring revenues. They have been bolstered in recent times with the US acquisitions of on-line buying and selling platform E*Commerce and fund supervisor Eaton Vance.

However what occurs when two of those legs get wobbly on the similar time? Buyers acquired a glimpse of this on Wednesday. First-quarter internet earnings at Morgan Stanley fell practically a fifth to $3bn as income dipped 2 per cent. Inside this, funding banking and debt and fairness underwriting revenues fell 11 per cent through the quarter.

Funding administration additionally had a subdued quarter, as declining market costs pushed property below administration and revenues from these down by 6 and three per cent, respectively.

This leaves wealth administration to do the heavy lifting. However the division’s 11 per cent leap in high line is much less spectacular than it seems. The acquire was fully pushed by internet curiosity earnings, unlikely to be repeated ought to the Federal Reserve sluggish its tempo of financial tightening. Furthermore, Morgan Stanley is just not proof against deposit flight.

These deposits fell 3 per cent to $341bn from final quarter as shoppers on its E*Commerce platform moved uninvested money into money-market funds. It additionally needed to pay as much as maintain rich prospects from defecting to higher-earning merchandise. Its annualised weighted common value of deposits rose to 2.05 per cent on the finish of March, in contrast with simply 0.09 per cent a yr in the past.

Morgan Stanley’s shares — up 4 per cent this yr — have held up regardless of the latest sector turmoil. A valuation of two.2 occasions tangible ebook worth displays a punchy return on tangible fairness of 16.9 per cent. Nonetheless, the inventory value seems weak because the dealmaking drought continues and the results of upper funding prices hit its backside line.

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