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James Gorman has a simple message for his successor: do not mess it up. Morgan Stanley will imminently name a new chief executive to replace Gorman, in charge since 2010. On Wednesday, the bank reported relatively weak earnings — they fell 9 per cent mostly due to a 30 per cent drop in investment banking fees. Morgan Stanley shares lost 7 per cent in morning trading.
Any complaints from analysts quizzing Gorman on their call were largely quibbles. Could Morgan Stanley really achieve a targeted 20 per cent return on tangible equity? It only managed 13.5 per cent in this quarter given a dearth of deals. Was a 30 per cent operating margin possible in its vaunted wealth management business? This currently sits at 27 per cent.
Gorman parried those barbs with the aplomb of a celebrated CEO who will not be accountable for these goals. He defended those targets as figures the bank had previously hit or closely approached before. In contrast, David Solomon of Goldman Sachs had exchanges with analysts that were far more tense. One asked him who was responsible for his firm’s shaky performance.
Gorman’s big picture point was that the earnings cycle for Morgan Stanley will turn sharply upward in 2024, just in time for the new boss to notch some easy, early wins.
Gorman noted that once everyone felt confident that the Federal Reserve had stopped raising interest rates, companies could be sure of their costs of capital. They would then flood back to the M&A and IPO markets to pursue strategic agendas.
In the wealth business, net interest income has fallen year over year. Profits from lending previously lifted returns on capital. As rich clients seek better returns on their cash, margins have been squeezed.
The company emphasised that growth in assets managed and the management fees earned on those assets should balance the pressures from tighter spreads between lending and borrowing. After several important wealth management acquisitions by Gorman, the next chief can focus on executing the current strategy.
Shares of Morgan Stanley are down 13 per cent this year and now trade at 1.35 times book value, compared to about 1 times less favoured Goldman Sachs.
Gorman, however secure he may feel, will still want a last share rally this week. He might not want too much low-hanging fruit left for his successor.
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