NEW YORK: Morgan Stanley, which has spent three years throwing out bad apples from its fixed income trading portfolio, now wants to put the freed up money into businesses that bear healthier fruit.
It is reinvesting capital previously held against unprofitable trades into areas like municipal bonds, credit and securitisation, where it sees opportunities for boosting profit, senior executives at the bank said.
This step represents a turning point in the bank’s efforts to shrink to the point where it can make money again in bond trading. New regulations put in place after the financial crisis have made the business more expensive for big banks, forcing them, for example, to use shareholder money to finance their trades instead of cheaper debt. As trading becomes more expensive, many banks have to be choosier about which trades to do.
“We’ve been very focused on ‘what is the return on equity in the business?’” Chief Financial Officer Ruth Porat said in an interview, referring to a measure of profitability.
The bank’s risk-weighted fixed-income trading assets have shrunk to $190bn, close to its target of $180bn by the end of next year, giving Morgan Stanley more room to reinvest in the business again, the executives said.
At this stage, Morgan Stanley’s bond trading business sits in a gray zone — not as big as JPMorgan Chase & Co’s, nor as profitable as Goldman Sachs Group Inc’s. The bank’s executives have sometimes been inconsistent in their statements about where the business is headed.
In 2010 and 2011, management said the bank was committed to growing revenue in a range of fixed-income trading businesses, and pledged to increase market share by 2 percentage points. One focus was growing trading in interest-rate driven products like Treasuries, a business that generally requires a big balance sheet to be successful.
The bank quietly scrapped that plan as regulations evolved, and after the person it had hired from Goldman Sachs to expand that business was unsuccessful and left. Morgan Stanley executives later told analysts that the fixed-income trading unit just needed to reach an average quarterly revenue of $1.75bn to be profitable.
Reuters
