Dynamic Wealth Management Headlines: Morgan Stanley Seeks Fixed-Income Rebound After Target Miss

Morgan Stanley, which last year missed an internal trading-revenue target by more than 40 percent, is under pressure to show improvement after a two-year effort to turn around the firm's fixed-income trading business. End Quote

(1888PressRelease) October 03, 2011 - The fixed-income unit failed to deliver on a promised revenue increase last year, leading to the missed target, according to a person with direct knowledge of the figures. It has been beset by management turnover, weak markets, bad bets and a struggle to win back clients lost when the firm retrenched during the financial crisis, according to interviews with nine current and former executives who requested anonymity because they weren't authorized to speak.

Chief Executive Officer James Gorman, 53, is looking to prove to investors this week when results are reported that the firm is advancing toward his goal of boosting market share in fixed-income trading by 2 percentage points. With the stock down 69 percent since 2006 to $21.09 last week, Colm Kelleher and Ken deRegt, both 20-year veterans of the company, aim to succeed at a task that has taken down three senior executives.

"I'm absolutely surprised at how slow it has been," said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who has a "buy" rating on the firm's shares and is a former Morgan Stanley treasurer. "I'd love to tell you what the trajectory is going to be, but I don't know how rapidly one can come back."

Second-Quarter Results
Morgan Stanley (MS) has made some progress. About 70 percent of clients in a Greenwich Associates survey reported using the New York-based firm as a fixed-income dealer last year, up from 56 percent in 2009. The company said revenue at its interest-rates unit climbed 10 percent in the first quarter from a year earlier, while total revenue in that business for the 10 largest U.S. and European banks fell about 11 percent, according to London-based research firm Coalition Development Ltd.
More evidence of progress may come July 21, when the bank announces second-quarter results. While Citigroup Inc. and JPMorgan Chase & Co. (JPM) both reported that fixed-income trading revenue dropped at least 18 percent from the first quarter, Fiona Swaffield, an RBC Capital Markets analyst, and David Trone at JMP Securities expect Morgan Stanley to post fixed-income revenue of $1.9 billion, little changed from the first three months of the year. That would represent a market-share gain.

The bank may reap $200 million in the second quarter from hedges against monoline insurers, including MBIA Inc., after $318 million of losses in the first quarter, Howard Chen, a Credit Suisse Group AG analyst, said in a note last month.

Mary Claire Delaney, a spokesman for Morgan Stanley in New York, declined to comment on the firm's fixed-income business.

Falling Behind
Morgan Stanley fell behind rivals in 2009 as fixed-income trading became the dominant capital-markets business for the largest global banks. Fixed-income units include banks' trading in government and corporate bonds, currencies, commodities, mortgage-backed securities, interest-rate swaps, credit-default swaps and other derivatives.

Fixed income, currencies and commodities, or FICC, has topped combined revenue from equities trading and investment banking at the biggest banks in each of the past two years. It also has a pretax margin of about 25 percent, almost double that of equity trading, according to Hintz.

The firm had a market share based on revenue of about 6.5 percent among the top nine U.S. and European investment banks last year, up from about 5.5 percent in 2009 and down from about 9 percent in 2006, according to an April report by Glenn Schorr, a Nomura Holdings Inc. analyst. That dropped to 6 percent in the first quarter, according to RBC's Swaffield. Both analysts excluded losses and gains tied to the banks' own debt, known as debt-valuation adjustments, or DVAs.

JPMorgan, Goldman
JPMorgan had the largest market share last year, with 14.9 percent, while Citigroup, London-based Barclays Plc and Goldman Sachs Group Inc. (GS) each had more than 13 percent, Swaffield wrote in a June note. JPMorgan and Citigroup both reported results last week. Goldman is scheduled to announce them tomorrow and Barclays on Aug. 2.

Gorman, an Australian and former McKinsey & Co. consultant who previously led the firm's wealth-management business, has put forward a strategy that relies more on Morgan Stanley's 17,000-plus brokers and less on principal risk-taking. Still, he has called repairing the fixed-income unit his priority.

Kelleher, 54, an accountant at Arthur Andersen LLP before joining Morgan Stanley in 1989 as a fixed-income salesman, took charge of trading after Gorman ousted Mitch Petrick in late 2009. Kelleher, the firm's chief financial officer during the crisis, has overseen a rebound in the equities business, which last year topped all U.S. rivals except Goldman Sachs.

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