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James Gorman has a simple message for his successor: do not mess it up. Morgan Stanley will soon announce a new CEO to replace Gorman, who has been in charge since 2010. The bank reported slightly weak earnings on Wednesday, with a 9% decline mostly attributed to a 30% drop in investment banking fees. This caused a 7% decrease in Morgan Stanley shares during morning trading.
Analysts’ complaints during the call were mostly minor. Could Morgan Stanley truly achieve a targeted 20% return on tangible equity? In this quarter, it only managed 13.5% due to a lack of deals. Was a 30% operating margin achievable in its acclaimed wealth management business? Currently, it sits at 27%.
Gorman skillfully defended these targets, citing previous successes or near successes. In contrast, David Solomon of Goldman Sachs faced more tense exchanges with analysts. One asked him who should take responsibility for his firm’s underwhelming performance.
Gorman’s main point was that Morgan Stanley’s earnings cycle would sharply improve in 2024, conveniently allowing the new CEO to achieve some early wins. He noted that once the Federal Reserve stopped raising interest rates and companies regained confidence in their capital costs, they would return to the M&A and IPO markets to pursue strategic goals.
The wealth business saw a decline in net interest income. Previously, lending profits boosted capital returns. However, as affluent clients seek higher returns, margins have been squeezed.
The company emphasized that growth in managed assets and the resulting management fees would balance the pressures from tighter lending and borrowing spreads. After Gorman’s significant wealth management acquisitions, the incoming CEO can focus on executing the current strategy.
Morgan Stanley shares have fallen 13% this year and currently trade at 1.35 times book value, compared to the less favorable Goldman Sachs at about 1 times book value.
Despite feeling secure, Gorman would still like to see a share rally this week, leaving minimal low-hanging fruit for his successor.
The Lex team is interested in hearing more from readers. Please share your thoughts on Morgan Stanley in the comments below.
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