Morgan Stanley: time to rethink that wealth manager premium

Morgan Stanley’s “three-legged stool” approach to business is being put to the test. As led by James Gorman, the Wall Street group has long commanded a premium over investment banking rival Goldman Sachs, thanks to the former’s wealth and asset management businesses.

Both have provided stable, recurring revenues. They were bolstered in recent years with the US acquisitions of online trading platform E*Trade and fund manager Eaton Vance.

But what happens when two of these legs get wobbly at the same time? Investors got a glimpse of this on Wednesday. First-quarter net income at Morgan Stanley fell nearly a fifth to $3bn as revenue dipped 2 per cent. Within this, investment banking and debt and equity underwriting revenues fell 11 per cent during the quarter.

Investment management also had a subdued quarter, as declining market prices pushed assets under management and revenues from these down by 6 and 3 per cent, respectively.

This leaves wealth management to do the heavy lifting. But the division’s 11 per cent jump in top line is less impressive than it looks. The gain was entirely driven by net interest income, unlikely to be repeated should the Federal Reserve slow its pace of monetary tightening. Moreover, Morgan Stanley is not immune to deposit flight.

These deposits fell 3 per cent to $341bn from last quarter as clients on its E*Trade platform moved uninvested cash into money-market funds. It also had to pay up to keep wealthy customers from defecting to higher-earning products. Its annualised weighted average cost of deposits rose to 2.05 per cent at the end of March, compared with just 0.09 per cent a year ago.

Morgan Stanley’s shares — up 4 per cent this year — have held up despite the recent sector turmoil. A valuation of 2.2 times tangible book value reflects a punchy return on tangible equity of 16.9 per cent. Still, the stock price looks vulnerable as the dealmaking drought continues and the effects of higher funding costs hit its bottom line.