Morgan Stanley (NYSE:MS) is reportedly trying to figure out how its commodities trading unit best fits in its business model – and more importantly whether it should actually have a place in its business model – once the Volcker Rule imposes a ban on several of its activities. 
Although no concrete plans have materialized as of now, the global investment bank is apparently weighing the merits of a complete sale of its commodities unit versus the sale of a minority stake in the business. Once the leader in the global commodities market, Morgan Stanley has been pushed to the fourth position by competitors JPMorgan Chase (NYSE:JPM), Barclays (NYSE:BCS) and Goldman Sachs (NYSE:GS).
We stick to our $23 price estimate for Morgan Stanley’s stock - a considerable premium to the bank’s current near-$14 market price. We believe the difference can be attributed to the significant pessimism among investors towards the investment bank’s stock given the deteriorating economic condition in several European nations, as Morgan Stanley has a sizable exposure to these economies.
Commodities Trading Has Lost Its Glitter
Morgan Stanley reports its commodities trading revenues as a part of its FICC (Fixed-Income, Currencies & Commodities) business – the most valuable division for the bank as seen in the chart above. And while the exact figure for revenues generated by trading specifically in commodities is not reported, estimates peg this value at about $17 billion for the past decade with the contribution over the last two years being about $1.5 billion.  
This reflects the shift in Morgan Stanley’s focus away from commodities trading – a notable development considering the fact that the bank was one of the pioneers in this industry. One of the primary reasons for this shift is the impending Volcker Rule, which curbs proprietary trading – effectively reining in a major portion of commodities trading for all banks.
But there is a bigger, more pressing reason for Morgan Stanley to think of exit options. Moody’s is expected to downgrade Morgan Stanley by as much as three notches later this month, a move that may force the bank to put up almost $10 billion as additional collateral. Clearly the bank wants to get its options on the table before such an event actually occurs. No doubt, the sale will also help take the bank take some risky trading assets off its balance sheet – helping it on the way to shoring up for stricter capital requirements.
So who would want to buy the business? The answer could be private equity (PE) firms. The Volcker Rule does not apply to PE firms, which means they can acquire the business and run it as is. This would explain the interest PE giant Blackstone has reportedly shown in Morgan Stanley’s commodities business.Notes:
- Morgan Stanley may sell part of commods unit-CNBC, Reuters, Jun 6 2012 [↩] [↩]
- Morgan Stanley Said To Consider Commodities Unit Sale, Bloomberg, Jun 6 2012 [↩]