Morgan Stanley profits up on lending, cost cutting; adviser force stable

First-quarter profit in the wealth unit rose 66% from last year as firm focused on expanding lending to clients and trimming operational expenses

Apr 17, 2014 @ 12:05 pm

By Mason Braswell

Morgan Stanley Wealth Management, Bank of America Merrill Lynch, earnings, first quarter, advisers
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Morgan Stanley Wealth Management's first-quarter profit jumped 66% from the year-earlier period as income from lending soared and the firm continued to cut back on expenses.

The firm posted a quarterly profit of $423 million, up from $255 million in the year-earlier period, driven mainly by increases in fee revenue and net interest income. and a 6% reduction in non-compensation expenses.

The wealth management unit's profit margin was 19% in the quarter, and Ruth Porat, Morgan Stanley's chief financial officer, said that given the first-quarter trends, executives remain optimistic the firm will be able to meet its target of profit margins of 22% to 25% in the wealth management business by year-end.

“We still feel very good about that and hold that as something that we are looking to deliver and that doesn't assume any benefit from rates and the environment,” she said Thursday on a quarterly earnings conference call. “We have a number of factors taking that higher.”

(More: After troubled start, Morgan Stanley tech platform stabilized)

Ms. Porat pointed to lending as one of the key drivers. Net interest income, a sign of how much the firm is making on its loans and lending products, surged to $539 million, up 31% from the first quarter of 2013. That number now rivals the $540 million the firm brought in last quarter in commission and fee revenue.

The firm has said it remains “underpenetrated” relative to competitors in terms of how many clients have taken out loans and has encouraged advisers to offer more lending products.

“You can see the ongoing momentum there,” Ms. Porat said. “As financial advisers start working with clients with lending, they continue to further penetrate their client base, and we are seeing much more of a take-up.”

Average revenue per financial adviser over the past 12 months, however, fell slightly to $881,000, from $905,000, at the end of 2013. That number lags behind some of the firm's wirehouse competitors, including Bank of America Merrill Lynch, which posted average trailing-12-month revenue of more than $1 million.

Morgan Stanley is continuing efforts to improve expense management, Ms. Porat said. Although compensation expenses rose slightly, non-compensation expenses declined 6% to $762 million in the period, from $808 million a year earlier.

In addition, Morgan Stanley has been working to streamline operations. This month, the firm announced that it plans to cut back its number of geographical divisions and regions, shuffling some top leadership. A longtime legacy Smith Barney director, Doug Kentfield, divisional director for the Western division, is leaving the firm next month.

(Related: Morgan Stanley Wealth Management shuffles field leadership)

On the call, Morgan Stanley's chief executive, James Gorman, said that the moves were designed to “make the organization a little more nimble.”

At the branch level, the firm said it plans to keep its managers and financial advisers in place and is done consolidating personnel following the final absorption of the Smith Barney joint venture. Morgan Stanley purchased its final 35% stake in the joint venture with Smith Barney from Citigroup Inc. last year.

The decline in the number of branches to 642 from 649 in the last three months was related to consolidating space rather than reducing the number of advisers or decreasing the footprint, the firm said.

In New York, for example, Morgan Stanley is in the process of consolidating four locations as leases expire. No branch managers or teams are being cut as part of that move, however. Mr. Gorman said on the call that head count had stabilized following the Smith Barney integration.

The firm reported adding 142 advisers since March 31 last year, bringing total head count at the largest wirehouse to 16,426.

Asset management fees ticked up to $2.02 billion from $1.86 billion in the year-earlier quarter as stronger markets helped push client assets higher, Ms. Porat said. But trading revenue, at $275 million, was down 8% from the year-earlier period. Commissions and fees fell 3% to $540 million, from $559 million.

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