Over the last three years Morgan Stanley (MS 2.24%) has significantly de-risked its balance sheet and continued to leverage its strong market position in asset and wealth management. Morgan Stanley also managed to stay largely out of the spotlight, an accomplishment that other investment banks such as Goldman Sachs (GS +0.06%) or J.P. Morgan (JPM +1.25%) could not present to their increasingly anxious shareholders.
Morgan Stanley still trades only at a 19% premium to its first quarter 2014 tangible book value per share of $27.41. Though Morgan Stanley is probably the most low-profile investment bank in the entire financial sector, the investment bank is clearly worth a closer look.
Staying out of the limelight
While J.P. Morgan made some negative headlines over the last two years relating to trading losses and billion dollar settlements with the Department of Justice and Goldman Sachs became the public scapegoat for the financial crisis, Morgan Stanley stayed out of the spotlight and had all the time in the world to concentrate on its business.
Strong asset management business with potential for further growth
Morgan Stanley's asset management business is clearly a jewel for the investment bank's earnings growth and profitability. Trends in Morgan Stanley's asset management practice have been steadily pointing upwards over the last three years.
Assets under management increased to $382 billion at the end of the first quarter 2014 and have grown by 50% since the beginning of 2010. Considering that equity markets were both doing poorly (in 2011) and doing great (from 2012 onwards), Morgan Stanley's accomplishment in growing assets under management is respectable.
Source: Morgan Stanley 2014 U.S. Financials Conference June 10, 2014
Managing capital for clients is a lucrative business. Especially if you play in the first league like Morgan Stanley.
Its wealth management business has consistently been a driver of Morgan Stanley's profitability. A steady increase in its net interest income and consistently increasing profitability, as measured by its pre-tax margin, highlight the strong market acceptance of Morgan Stanley's wealth management expertise.
Source: Morgan Stanley 2014 U.S. Financials Conference June 10, 2014
Investment banking business stable despite challenging environment
Morgan Stanley's Investment Banking division has seen surprisingly resilient revenues in light of the financial crisis and its aftermath. In 2009, Investment Banking revenues stood at $4.5 billion and at $4.4 billion in 2013 while exhibiting low overall levels of volatility.
Morgan Stanley's average revenues in the Investment Banking segment from 2009-2013 stood at $4.3 billion: A strong performance for a typically highly cyclical business that traditionally consists of key segments such as Mergers and Acquisitions and Equity and Debt Underwriting.
De-risking balance sheet a good thing for shareholders
As can be seen in the chart below, Morgan Stanley has significantly cut back its exposure to risky assets over the last three years. Level 3 assets, which are very illiquid assets that can't be valued easily, have been halved (measured as a percentage of total assets) since 2011. Basel III risk-weighted assets have been reduced by approximately 15% since 2011 to $428 billion.
Reducing leverage is key to ensuring the stability of the bank and, by extension, the financial system. A more stable, resilient bank is clearly in the interest of long-term Morgan Stanley shareholders.
Source: Morgan Stanley 2014 U.S. Financials Conference June 10, 2014
Final assessment
It is often the inconspicuous bank that deserves the most attention. While other banks continue to make negative headlines and consistently fight public relations battles, Morgan Stanley is in the fortunate position to concentrate on its business. With a strong investment management and private wealth management practice, Morgan Stanley could produce some positive surprises for investors down the road.
