(Reuters) – Morgan Stanley (MS.N) raised its performance targets on Thursday after exceeding Wall Street estimates by a wide margin, the last sign that the strategic vision of chief executive James Gorman for the bank is paying off.
FILE PHOTO: A street sign is located near the Morgan Stanley World Headquarters building in New York on May 8, 2009. REUTERS / Lucas Jackson / File Photo
In a presentation, Morgan Stanley set the bar for spending controls, returns on equity and equity management gains over the next two years and more.
The analysts cheered the new objectives, after repeatedly asking management when Morgan Stanley could update them, as the bank routinely met previous objectives.
Investors applauded the news, with Morgan Stanley shares rising 7.3% in morning trading.
The bank published its presentation after reporting a fourth-quarter earnings gain that showed that most of its businesses flourished.
Bond trading, subscription and investment management produced much higher revenues, with mergers and acquisitions being the only area that reported a significant decrease.
Overall, Morgan Stanley’s earnings increased 46%, to $ 2.09 billion, or $ 1.30 per share, from $ 1.36 billion, or 80 cents per share, a year earlier. (reut.rs/37b9508)
Analysts expected a profit of 99 cents per share, according to data from the Refinitiv IBES.
The bank’s net income increased 27% to $ 10.9 billion, and it met or exceeded the year-round performance targets that Gorman set last January.
Since taking office more than a decade ago, the 61-year-old CEO has transformed Morgan Stanley from a heavyweight Wall Street firm that loses money in a more balanced bank. It was the driving force behind Morgan Stanley’s decision to acquire Smith Barney, and made estate management the cornerstone of his plan to stabilize revenue.
Morgan Stanley shares have increased approximately 79% during the holding of Gorman, while the S&P 500 Banks .SPXBK and S&P 500 .SPX have almost tripled.
During an analyst call on Thursday, Gorman described the first five years of his term as a clean-up period after the financial crisis, and the second five as a time when he focused on business growth without sacrificing profitability.
Gorman noted that Morgan Stanley’s wealth business now generates approximately three times more daily income than five years ago, and his stock business has taken market share from its rivals at a time when industry revenues have declined. .
“We have significantly and intentionally transformed this business into what it is today,” he said. “As we move forward in the next phase of the company’s journey, the objectives listed here, assuming a normal market environment, should result as a natural consequence.”
Over the next two years, Gorman wants Morgan Stanley to reach an efficiency rate of 70-72%. In the long term, he hopes the bank can reach 70% or less.
That measure, which measures costs in relation to income, is closely watched by investors as a symbol of whether a company spends wisely. Morgan Stanley met its previous goal of 73% or less in 2019.
Keeping costs under control will help the bank reach another metric established by Gorman to obtain returns on capital (ROE), which shows the profitable way in which a bank uses shareholder funds.
Morgan Stanley now aims to produce a ROE of 13-15% until 2022, and 15-17% after that. His 11.7% ROE last year was within the previous Gorman target range of 10-13%.
Finally, he now wants the wealth unit to generate a profit margin before taxes of 28-30% over the next two years, and 30% or more after that. The business margin of 27.2% last year was comfortably within the previous goal of 26-28%.
In the call, some analysts analyzed the assumptions behind those figures, asking what could happen if markets collapse. On the other hand, Mike Mayo of Wells Fargo, who has repeatedly pressured management to increase objectives, asked why they shouldn’t be taller.
Gorman recalled a time when analysts were skeptical that Morgan Stanley could achieve much lower goals than he had set, when his ROE was only 2-4% and his wealth margins were only 10%. He compared them to the children in the back of a car and asked: “When are we going to get there?”
“What I have always tried to do with these goals is to establish a range in which the lower part of the range is what we should be able to meet in all normal circumstances,” he said. “The top of the range is obviously a bit sportier.”
Reports of Abhishek Manikandan in Bangalore and Elizabeth Dilts in New York; Written by Lauren Tara LaCapra; Edition of Saumyadeb Chakrabarty and Nick Zieminski