Morgan Stanley (MS 0.44%) is one of the largest investment banks in the world, and has performed pretty well recently, with the stock price up more than 20% over the past year.
However, there are some reasons to believe the growth has just begun for Morgan Stanley. While there is no way of knowing for sure if the company's profit growth will continue, the company is definitely on the right track in terms of growing its business, improving efficiency, and attracting new clients.
Tremendous investment banking growth
Morgan Stanley is doing an excellent job of growing its institutional securities division, which includes underwriting, advisory, and trading activities.
M&A activity has heated up lately, and this has helped Morgan Stanley grow its advisory revenues by more than 25% in the past year. Equity underwriting revenues experienced an even more dramatic jump of 50% to $489 million, reflecting the very strong IPO environment. Even fixed income underwriting increased by 26% on more investment-grade and high-yield issues.
More importantly, Morgan Stanley outpaced its peers in all three of these categories. In a hot IPO market, for instance, any investment bank should see more equity underwriting revenues. However, growing faster than the competition signals Morgan Stanley is doing something right.
For example, JPMorgan Chase only managed to grow its equity underwriting revenue by 4% and saw its fixed-income underwriting revenue fall by 6% from last year. Even industry leader Goldman Sachs didn't do as well, with its 47% jump in equity underwriting almost matching Morgan Stanley, but its 5% and 4% gains in fixed-income underwriting and advisory revenues fell short.
Improving efficiency
Morgan Stanley's wealth management business operated at a profit margin of above 20% for the first time since the acquisition from Citigroup, and also delivered record earnings.
Revenues from the division grew by 5%, and Morgan Stanley was able to cut expenses (other than compensation) by 9%. So, total expenses only grew by 3% year-over-year, and anytime expenses are growing slower than revenues, it'll result in better profit margins. The company has set a 22-25% target for its margins by the end of 2015, and the company is already very close to meeting its goal.
In other divisions, efficiency is improving as well. As a whole, the company grew revenues by 3% while keeping expenses constant, resulting in an overall expense ratio of 76%, which is a nice improvement from 79% a year ago. The wealth management business is also more efficient, producing 5% more revenue per employee as compared with last year.
And, as efficiency improves, it means more earnings for the company and more value for shareholders.
Client assets are growing in the right way
If you read the most recent quarterly report of virtually any U.S. financial institution, you are likely to find that assets under management have increased, and by an impressive amount.
However, with the S&P 500 up by about 15% in the past year, it's no wonder that assets are increasing. If a client has $1 million in their portfolio and it gains 15%, they now have $1.15 million with the firm. This doesn't necessarily mean the firm's business is doing well or growing.
The more important measurement of asset growth is to look at net inflows or outflows of money. By taking the amount of money that was deposited into accounts and subtracting the amount of money withdrawn from accounts, it lets us know if a firm's assets are growing independent of whatever the market is doing.
In a good year for the markets, it's entirely possible for a bank to end up with more assets in accounts than they started with, even though money is flowing out of accounts more quickly than it is flowing in. Conversely, during a down year for the markets, a bank's business could still be very healthy if clients are moving assets into their accounts.
In Morgan Stanley's case, the firm experienced $12.5 billion in net asset flows into fee-based accounts. Between this and the excellent market performance, client assets in fee-based accounts grew by 21%. So, the company is growing in the right ways, which should produce better growth than peers while the market is strong, and should also help Morgan Stanley outperform its peers in down years.
Will it go up from here?
Basically, Morgan Stanley seems to be firing on all cylinders right now, with excellent growth in revenues and efficiency. However, a lot of the company's good performance is dependent on a strong economy and stock market.
If the economic recovery continues to facilitate a strong IPO and M&A market and helps facilitate asset growth, Morgan Stanley stock could perform very well in the years to come.
