Morgan Stanley – Past to present

When we think financial services, Morgan Stanley is one of the first corporations that comes to mind. Their clients range from high-net-worth individuals to corporations, and even governments. They act as capital distributors, advisors, managers, and traders.

Currently hosting over 80,000 employees, engages in capital distribution, trading, asset management, and advisory services. Their operations can be grouped into three major departments: Institutional Securities, Wealth Management, and Investment Management. The revenue share of each of these business segments is estimated to be 42%, 48%, and 10% respectively.

History of Morgan Stanley

The origins of Morgan Stanley can be traced back to the famous J.P. Morgan & Co. The company’s formation came about as a consequence of the Glass–Steagall Act in 1933. This act prohibited corporations from engaging in both investment and commercial banking under the same holding entity.

This financial safety measure was signed off by President Roosevelt in response to the Great Depression of 1929. J.P. Morgan & Co. was engaged in both forms of banking but decided to remain in the commercial banking sector. This led to certain employees, notably Henry S. Morgan and Harold Stanley, leaving the company to resume investment banking. This marked the formation of Morgan Stanley.

Notable Clients and Achievements

When the World Bank made a public offering of AAA-rated bonds in 1952, Morgan Stanley co-managed the endeavour. They handled General Motors’ $300 million and AT&T’s $250 million debt issues, as well as IBM’s $231 million stock offering.

Morgan Stanley also lays claim to the first credible computerised financial analysis model, developed in 1962. This revolutionised the field of financial analysis.

Morgan Stanley also lays claim to the first credible computerised financial analysis model, developed in 1962. This revolutionised the field of financial analysis.

2008 Recession 

Undeniably all banks and investment banks received major blows during the 2008 recession. In a nutshell, the recession occurred due to poor financial regulation that allowed investment banks to behave irresponsibly. Up until 2008, pure investment banks such as Morgan Stanley and Goldman Sachs were able to operate without capital requirements and therefore push the boundaries of risk. Although both these firms survived the recession, others, such as Lehman Brothers, AIG, and Bear Sterns were fatal casualties of the financial collapse.

Post-Recession Restructuring

Through the bailouts of 2008, the government changed the face of banking. Both Morgan Stanley and Goldman Sachs had to restructure themselves as traditional BHCs (Bank Holding Companies) to receive the government bailout funds required to stay afloat. Although this change subjected them to additional regulations, Morgan Stanley has since started offering a variety of banking services in addition to investment banking. By becoming commercial banks, they have been able to prosper from the consumer market in novel ways. In short, they adapted.

Brokerage Services

After 2008, Morgan Stanley abandoned their proprietary trading desk and substantially lowered borrowing. However, the biggest change was the adoption of brokerage services. The deal to acquire the Salomon Smith Barney brokerage division was announced in January. The number of brokers at Morgan Stanley now stands over 20,000, making them the largest brokerage house in the USA. In 2009 Brad Hintz, an analyst at Sanford C. Bernstein & Co., estimated because of the acquisition that the brokerage division would ultimately account for 42% of Morgan Stanley’s revenue. It seems Hintz was correct since wealth management has become an integral part of Morgan Stanley’s business model and revenue at 48%.

2020 Pandemic era and Morgan Stanley

While most corporations of the world were entangled in a battle against uncertainty and insecurity, flourished during the two years of the COVID-19 pandemic. In 2020, they made two massive acquisitions – a $13 billion deal for online brokerage E*Trade and a $7 billion deal for wealth manager Eaton Vance.  In 2020, returns on equity and tangible equity were 13.1% and 15.2% respectively, higher than all rivals. Book value per share grew 12% and shareholder return was 38%. In 2021 they announced significant increases both in profit and revenue with 139% and 47%.

2024 Earnings

Morgan Stanley recently announced their Q2 earnings. Analysts had already forecast Morgan Stanley’s trading and investment banking division to do well but the numbers exceeded expectations. Despite predicted earnings being $1.65 per share, Morgan Stanley reported $1.82 per share. And the anticipated $14.3 billion revenue instead turned out to be a staggering $15.05 billion. These numbers work out to 41% and 12% increases respectively.

Morgan Stanley joined other Wall Street giants such as Bank of America (BAC.N) and JPMorgan in reporting positive investment banking results. These results can be credited to industry-wide confidence levels growing in anticipation of a Republican government returning to US office

Shares of the bank had declined earlier in the session after the bank’s wealth management division missed estimates on a decline in interest income. They were up less than 1% on Tuesday.

Interestingly, Wealth Management reported slightly underwhelming results. Revenue only grew 2% to $6.79 billion, below the $6.88 billion estimate, and interest income reduced by 17% to $1.79 billion compared to the previous year. Morgan Stanley believes these results to be a product of the current rate environment, incentivising its richer clients to invest in higher-yielding assets rather than deposits.

As far as Morgan Stanley’s investors are concerned, the Wealth Management numbers will have somewhat muted the hype around the Investment Banking results. Due to its steadier nature, Wealth Management is important to investors aiming for consistent results, rather than depending on the more volatile business of trading.

Morgan Stanley investors value the steadier nature of the wealth management business versus the less predictable nature of investment banking and trading, and they will want to hear more about expectations for the business going forward.

Trading Morgan Stanley with IronFX

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