Morgan Stanley’s latest quarterly earnings cast doubt on Chief Executive James Gorman’s low-risk strategy. The bank earned $740 million in the three months to September, after stripping out accounting gains on its own liabilities. That equates to an annualized return on equity of just 3.9 percent, the worst of any big U.S. bank for the period.
Wealth management is at least running relatively smoothly. Pre-tax income increased to $824 million, 3 percent over last year’s third quarter, even though the top line fell almost 6 percent to $3.6 billion. The operation now accounts for almost half the company’s revenue and requires far less capital than much of the investment banking unit.
That’s not enough, though, to overcome weaknesses elsewhere. Fixed-income trading, for example, went through a dramatic restructuring that reduced the entity’s risk-weighted assets to around $150 billion from almost $400 billion. But this capital-intensive business still has the power to weigh down the rest of the franchise. Revenue last quarter dropped to just $538 million, after excluding debt-related accounting gains. That’s 41 percent lower than for the same period last year, a bigger drop than at JPMorgan, Bank of America, Citigroup or Goldman Sachs.
So-called “other revenue” fell $112 million into the red, largely due to mark-to-market losses on loans and investments. And ructions in China wiped out pretty much all the carried-interest gains that the bank’s Asian private equity business, which is part of the investment management division, had booked in the second quarter.
Even adding back that loss of some $400 million, plus the $250 million the bank set aside for legal costs, wouldn’t have improved results much. Annualized return on equity would still have been only 7 percent, the meager level Goldman managed with its riskier, trading-focused business.
Shareholders responded to Morgan Stanley’s third-quarter drubbing by wiping out up to $4.7 billion of value on Monday morning. That pushed the supposedly safer, more solid enterprise that Gorman promised below book value. Goldman, meanwhile, trades at almost 1.1 times book value. Morgan Stanley may be getting more boring, but without the benefits.