After taking a harder look at its expense figures – and more importantly the increase in these figures over the recent quarters despite a steady decline in revenues – Morgan Stanley (NYSE:MS) has decided to do away with as many as 1,600 jobs across its businesses.  And to make these job cuts count better towards the income statement, the global investment bank will hand out most of the pink slips to employees at higher levels.
The rationale here sure makes sense – the fatter your pay, the more are your chances of being shown the door as part of this cost cutting initiative. It must be noted here that Morgan Stanley has already been hard at work trimming jobs, with the bank’s quarterly statements showing a 7% reduction in its global workforce over the first nine months of 2012. The new round of job cuts will reduce the workforce strength by another 3%.
We are in the process of updating our $19 price estimate for Morgan Stanley’s stock in view of these job cuts and the relaxation in Basel III requirements announced earlier this week.
It is no secret that Morgan Stanley has been struggling to keep revenues flowing in the wake of a slowdown in the global economy – a fate shared by most of the global investment banks. But even as the bank works towards stabilizing its top-line numbers by strengthening its business divisions, for example its wealth management business through an increased stake in what was once Smith Barney Wealth Management, the bigger problem facing the company is escalating expenses. To put things in perspective, Morgan Stanley handed out $3.9 billion in compensation and benefits to employees in Q3 2012 (74% of net revenues) compared to $3.6 billion in Q2 2012 (52% of net revenues) and Q3 2011 (37% of net revenues). Of course you can say that the percentage figures here are exaggerated in terms of operating revenues & expenses due to the impact of debt-revaluation related accounting changes that tend to swing wildly from one quarter to another. But one thing is clear from the expense figures – they are moving the wrong way, despite significant cuts in the employee base.
Morgan Stanley had almost 62,000 employees at the end of 2011, and worked this number down to 57,726 at the end of Q3 2012. The decision to slash another 1,600 jobs comes as hardly a surprise given CEO James Gorman’s view that the banking industry had “way too much capacity and compensation is way too high.”  And he also seems to favor the ‘top-down’ approach this time around with most of the cuts coming from higher management levels.
While nearly half the job cuts will be across operations in the U.S., the main target is the bank’s investment banking operations which will see employee strength shrinking by as much as 6%. This will have a significant impact on the bank’s value as compensation expenses for these operations will reduce by well above 6% in subsequent quarters – as the cuts will largely affect the employees drawing high salaries. So, even if margins improve by a conservative two percentage points beginning 2013 for our estimates shown in the chart above, this would represent a 5% improvement in the bank’s share value.Notes: