Summary
- Morgan Stanley continues to perform well, functioning under the business model put into place by James Gorman nine years ago.
- The bank continues to earn a return on equity close to 11 percent, and performance continues to be steady, something Mr. Gorman has aimed for.
- The basic question outstanding has to do with whether or not Mr. Gorman's business model will continue to hold up, given that the economic environment has changed.
For the third quarter of 2019, Morgan Stanley (NYSE:MS) posted a 10.7 percent return on equity, which continues the bank's efforts to restructure itself and produce steadier results. James Gorman, the bank's CEO, became the head of Morgan Stanley in January 2010 and has steadily guided the organization from a 2.5 percent return on equity to the current level.
During time, Mr. Gorman has cut costs, reduced the size of the company's trading division, and has moved resources into wealth management, which now account for about half of Morgan Stanley's revenue.
Morgan Stanley turned in a 2 percent, year-over-year, increase in revenues, topping $10 billion, their highest level in a decade, and saw net earnings rise by 3 percent to $2.17 billion.
Jon Pruzan, the bank's chief financial officer, is quoted by the Financial Times:
"Since its 'significant' restructuring, the bank had kept 'gaining momentum and share and we fee; very good about that business.'"
Elsewhere, in the Financial Times, it is argued,
'Under Mr. Gorman, the bank has moved to diversity away from high takes equity trading and investment banking to focus on less glamorous businesses like wealth management and reviving bond trading."
Some of these efforts are paying off. Fixed income sales and trading were the powerhouse during the quarter. The unit delivered an industry-leading 21 percent jump in revenue to $1.42 billion. Debt underwriting also had a strong run as the bank benefited from the rush of companies looking to take advantage of falling rates to borrow or refinance existing debt.
Of course, the performance of Morgan Stanley is being put into comparison with that of Goldman Sachs Group Inc. (NYSE:GS), the other bank of the largest banks coming from an investment banking background.
Goldman Sachs had a "bad" third quarter.
"In the third quarter, Goldman Sachs earned only a 9 percent return on equity as its profits for the quarter fell 26 percent from a year ago."
One reason for the different returns is that Goldman began its "restructuring" at a later date than did Morgan Stanley.
As mentioned above, Mr. Gorman came into hid position with every intent upon changing the bank's business model. Mr. Gorman wanted the bank to become less like an investment bank, subject to the volatilities investment banks face.
Goldman, on the other hand, liked the business model it rode through the Great Recession and, arrogantly, claimed that it had no need of altering its way of doing business.
