Morgan Stanley CEO James Gorman told Bloomberg Television's Erik Schatzker on "Market Makers" today that he's encouraged by Merrill Lynch's higher profit margin:
"It's great news, because it's proof positive that doubling up in this space was a smart thing to do…I always like to see somebody out there who's setting a higher bar as a demonstration of what can be done."
On the banking industry, Gorman said:
"I think things are pretty rational right now to be honest. I've been in and around the industry for 25 years. It is a sober environment that we operate in. The leadership of the banks, all of whom I know pretty well, are very sober quality professional people. I don't see a lot of holes at the large institutions in terms of rational behavior at all."
source: Bloomberg Televsion
Gorman on what stands out Morgan Stanley's most meaningful achievement in Q2:
"Firstly, it was very steady. One of the things this management team has focused on is giving deliberate, predictable results for the marketplace. So we're very pleased with that. But the standouts on the business performance--institutional equities was a total blowout. They had a phenomenal quarter. $1.8B in revenues. Best quarter--it's been a business that has been doing great for a long time, but it had an absolute blowout. Wealth management margins, 5th quarter in a row, 18.5%. And in fixed income, bringing down the risk-weighted assets--we are below where we were in the first quarter, which was below the year-end target at $237-239 billion. A lot of good news, but not perfect. This is a continuous journey, but a lot of good news."
On whether a blowout is sustainable:
"I think it is very broad based. If you look at equities performance by region and product, it was very strong. Prime brokerage was very strong. Cash equities was very strong. The derivatives business was strong. It was strong in asia, japan, strong in Europe and strong here. It was a good performance, no question about it."
On weaknesses:
"Sure, there are always weaknesses, unhappily. Our ROE is not where we want it to be. We are on that journey, but it's not where we need it to be or not where we want it to be…That wasn't disappointing -- that's clearly a function of where we are in this turnaround of the institution. It was well understood, but not where our aspiration is. On comp expenses we're up a couple of hundred million. We took some extra reserves relating to litigation as we have to. There is litigation coming out of the financial crisis that all of the banks are now dealing with. Fixed income recovered materially from the second quarter of last year, but isn't we want our fixed income business to be or will be."
On the brokerage business and whether he can get the pretax margin up to 20% if Q3 is as good as Q2:
"I'm less focused on which quarter that happens in, but it will happen…investors are inpatient. By their nature and design, they want results to exceed always. We laid out some targets a couple of years ago and we were premature. We got ahead of ourselves coming into a very long extended zero interest rate environment with a depressed equities market. The equities market has recovered. We laid out new targets at 15%. We obviously just exceeded those. We laid out targets a couple months ago that we could get to 20 and ultimately above that. And we will."
On what Merrill Lynch is doing that Morgan Stanley should be doing more of:
"Firstly, it is great news because it is proof positive that doubling up in this space was a smart thing to do. I always like to see somebody out there who is setting a higher bar as a demonstration of what can be done. Secondly, it's a much more mature business. The whole banking strategy originated when I was running the business back in 2000. The retail business. It has had 13 years and we have had a couple of years. There are some material differences of where we are in the cycle but what I like is the slope of the gradient."
On Morgan Stanley's fixed income business and the axiom that size matters:
"Back to the size matters axiom. We have outperformed all the institutions that are larger than us year to date in terms of the aggregate stock price performance. Size matters to the extent that you need to be at scale. If you have a global multiproduct business, as we do with credit rates, foreign exchange, securitized credit across the whole spectrum -- if you have that business, you need to be at a certain scale to get there. We are at that scale. We are comfortable with that. Beyond that, size does not matter. What matters is returns. You go to, what is the minimum size you need to be at to be a global player, multiproduct player. Once you have achieved that, what really matters is the returns. In other words, the composition of your assets, the risk weighted assets, the capital to support the business and returns on that. We are very focused on returns."
On which businesses inside FIC are getting capital and which ones don't deserve it:
"It is not so much don't deserve. Some of them aren't earning in our returns yet which we laid out in a conference we had four or five weeks ago. Clearly our commodities business struggled in the last nine months, had a better second quarter than it did first. Better first than fourth quarter. Historically it has been tremendous business for Morgan Stanley, but it has been struggling….There have been changes under dodd-frank so we are making some improvements to that business. Our corporate credit and credit business have been doing great. Securitized credit businesses this first six months have done great. If you look across the spectrum of fixed income businesses, we are not unhappy with where we are. We are just not delivering all we can deliver."
On whether MS should stay in commodities if the bank can't find an investor to help capitalize that business:
"Absolutely. As any business executive, what you are doing is always looking and remaining open to different structures and options that can help improve returns. If we could find the right structure to help with our commodities business, we would move on it. We are quite patient. We have a very strong underlying commodities business and we have no compulsion to act irrationally. We're trying to find a structure--if it's out there--that will help us manage a larger balance sheet in that business, has high cost of funding, requires a lot of liquidity, but is fundamentally a strong business."
On ROE and whether he still feels good about getting to the target of 10%:
"Absolutely. No change whatsoever. You can't obsess about 13 week periods because there is too much is going on. For example, we had a charge relating to the close of the Smith Barney transaction. That will not repeat itself. We did not own 35% of that business and the earnings from that. That won't repeat itself. What you have to look at is, what does the future look like? Not the past. We have laid the bricks very patiently over a three or four year period and now we are building on it."
On whether compensation on Wall Street is where it needs to be right now:
"Comp should be a reflection of returns for shareholders, so there's no absolute level. It's in the context of shareholders giving you their equity and getting a decent return on that. As all of the banks are recovering, shareholders are starting to get better returns and compensation will reflect that and reflect market competitive pressures."
On whether everyone is behaving rationally or do bad actors exist:
"It's a complicated industry. I don't want to call them bad actors. There are always irrational behaviors from different firms at different stages. It's not that I don't care about other firms, I don't want to talk about other firms."
"I think things are pretty rational right now to be honest. I've been in and around the industry for 25 years. It is a sober environment that we operate in. The leadership of the banks, all of whom I know pretty well, are very sober quality professional people. I don't see a lot of holes at the large institutions in terms of rational behavior at all."
On what the Federal Reserve should do:
"I think Chairman Bernanke has done a phenomenal job. Just watching him testify, you think of all of the things that he has been through for this country. So hats off to him. I think the Fed has played this well. They need to see concrete, unambiguous signs of recovery, at which point we should all celebrate the fact that rates are rising. It is a good sign. When rates rise, it is a reflection that the economy is recovering. Ultimately it is an adjudication of the strength of the economic platform that is propping this country up."
On whether the market is right to be pricing in less stimulus now:
"Well the market is always trying to time it. If it was so easy, everyone would have much easier lives. I don't know if the timing is right now or not. It seems like the chairman and board have been very patient and have wanted to see real, concrete evidence. I think the market may be a little ahead of it."
On whether he would vote to start tapering in Q3 if he was sitting on the FOMC:
"No, I would not…I think you need to see enough concrete signs. The chairman has laid out 6.5% unemployment as the target and I don't know why you deviate from that."
On the new leverage ratio:
"The large banks will all manage against the new leverage ratio well in advance of the ultimate application, which I think is 2018…Our capital plans will reflect the accretion of earnings.
