After trying its best to reap the benefits of India’s growth story for a little over four years, Morgan Stanley (NYSE:MS) has reportedly thrown in the towel and is reviewing options for its private wealth management business in the country.  The move is part of the global investment bank’s decision to exit all under-performing wealth management units across the globe – something which stems from the company’s focus on improving margins for its wealth management business. Morgan Stanley set itself the goal of turning around margins for the business from current single-digit figures to around twenty percent. The ongoing review does not include the bank’s more established investment banking operations in India.
We have a $19 price estimate for Morgan Stanley’s stock, which is about 15% above the current market price. Much of this difference can be attributed to the rather negative outlook for banks in light of the re-election of President Obama who is a staunch supporter of tighter regulations for the financial sector.
Morgan Stanley entered India’s private wealth management market in September 2008 in what was the bank’s first foray into the private wealth industry in Asia. Over the years, Morgan Stanley expanded its reach in the country with operations in four cities and employs around 70 people today. The unit has around $1 billion in assets under management, including loans handed out – a fraction of its total wealth management assets are shown in the chart below.
But the unit performed poorly compared to the high expectations it carried primarily because of the highly fragmented nature of the market in the country combined with strong competition. As a Morgan Stanley employee puts it, “from the macro perspective it looks great in India, but when you get down to the ground it’s a very different game.”  The country’s industrial ultra-rich are employing people in their own conglomerates to manage their fortunes and the commonly prevalent practice of stashing away millions in offshore accounts to evade taxes result in a smaller potential customer base for global banks setting shop in India than what they initially estimate. A large number of local players and regulatory restrictions on products that can be offered to investors only add more pressure to already low margins in the business.
Morgan Stanley is working toward revamping its wealth management business, a step that became more important after it acquired an additional 14% stake in Smith Barney from Citigroup (NYSE:C) – taking its stake in the recently rechristened joint venture to 65% (see Morgan Stanley Smith Barney Gives Way To Morgan Stanley Wealth Management). And pulling down the shutters on all units which are barely breaking even only seems the right thing to do in the interest of the global business.Notes:
- Morgan Stanley Reviewing Indian Private-Wealth Unit, The Wall Street Journal, Nov 7 2012 [↩]
- Morgan Stanley selling its Indian private bank: sources, Reuters, Nov 7 2012 [↩]