By Antony Currie
NEW YORK (Reuters Breakingviews) - Morgan Stanley is lumping its shareholders with a volatility challenge. In the first quarter the $94 billion Wall Street firm defended key turf against a surge from rivals and more than doubled fixed-income trading revenue from the last three months of 2017. That – and tax cuts – helped generate its best results in years, handily beating Chief Executive James Gorman’s admittedly underwhelming targets. The dilemma for investors is whether that merits a higher valuation.
The bank’s most recent earnings back up the notion that the overhaul Gorman instituted in 2015 is working. The fixed-income trading unit’s $1.9 billion top line, compared with $800 million in a slow fourth quarter, shows it does have “significant potential upside,” as Gorman put it in January, when volatility picks up.
Retaining its four-year-long ranking as the biggest equity trader was important, too. Morgan Stanley could only manage half the 70 percent or so growth since December racked up by closest rivals Goldman Sachs and JPMorgan. But with $2.6 billion in revenue, Gorman’s bank remains comfortably ahead – and just pipped Goldman to stay top of the equity underwriting heap.
That, along with a wealth-management arm that cranked out a respectable 26.5 percent pre-tax margin, contributed to a 14.9 percent annualized return on equity for the first quarter. That’s only just behind Goldman and JPMorgan and handily bests Gorman’s self-imposed goal of a 10 percent to 13 percent rate of return.
It presents shareholders with another quandary. They are already struggling to decide which of Morgan Stanley and Goldman Sachs to ascribe a higher multiple to: both trade just shy of 1.4 times current book value. On last quarter’s showing alone, both might warrant an upgrade to the just over 1.6 times that JPMorgan sports.
Trouble is, glimmers of improvements in industry-wide trading revenue – especially in fixed income, currency and commodities – have proven illusory in the past. Tax cuts, economic growth, diverging central bank policies around the world and growing instability in international political relations could all contribute to volatility being here to stay. Shareholders who have been burned before know to tread cautiously.
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