Morgan Stanley said it will miss profit-margin goals for its brokerage joint venture with
Citigroup Inc.'s Smith Barney, blaming the May 6 market crash for scaring away investors.
“Hitting those targets, given it's a fairly formulaic business in many respects, will get pushed out because the performance is market-dependent,” Chief Financial Officer Ruth Porat said today in an interview.
James Gorman, who led the wealth-management business before becoming chief executive officer in January, said in February the bank expected to increase the unit's pretax profit margin to 15 percent by the end of this year and to more than 20 percent by the end of 2011. The margin was 7 percent in the second quarter, down from 9 percent in the first, Morgan Stanley said today in announcing earnings that beat analysts' estimates.
Gorman, 52, also set out a goal of more than $20 billion in net new client assets for this year and $50 billion for 2011. The wealth-management unit, led by Charles Johnston, had new asset outflows of $5.5 billion in the second quarter, after $9.3 billion of net new client assets in the first.
The so-called flash crash of May 6 erased $862 billion in value from U.S. equities in less than 20 minutes. Consulting firm Accenture Plc fell as much as 99 percent before rebounding, and almost 20,800 trades were later canceled. Regulators have put circuit-breaker programs in place to help prevent short-term panics.
‘Sheer Randomness'
“The impact that the flash crash had on the individual investor psyche, it almost seems that the sheer randomness of it was kind of the tipping point,” Porat, 52, said. “We saw a real step-back from the market, and given that this is a scale business, having that activity pull out, particularly the transaction-related activity, put real pressure on the margins.”
Global wealth management posted pretax income of $207 million, compared with a loss of $71 million in the second quarter of 2009, when Morgan Stanley completed the joint venture, the company said today. The unit had $3.07 billion in revenue, down from $3.11 billion in the first quarter.
Gorman said in a letter to shareholders earlier this month that the joint venture will play “an increasingly important role” in the firm's growth.
“We need retail investors to re-engage,” Porat said in the interview. “We're continuing to execute, because that's what we can do and that positions us better for those days that always do return, but for now our view is that hitting the targets in our metrics that matter will get pushed out.”
